By

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tim hArcourtJose Antonio ArdAvinmArio GArciA molinAPAblo de lA flor

nicolAs munoz tomAs bulAtmAriAnA ferreirA

ISBN 978-1-74322-147-1

tim hArcourtThe JW Nevile Fellow in Economics

at the Australian School of Business,

UNSW and author-host of The Airport

Economist in Sydney, Australia.

Jose Antonio ArdAvin Head of the Latin America Unit at the

Global Relations Secretariat of the

OECD, based in Paris. Formerly Head

of the OECD Mexico Centre, based in

Mexico City.

mArio GArciA-molinAProfessor Universidad Nacional

de Colombia, Universidad Externado

de Colombia in Bogota, Colombia.

PAblo de lA florDivision Manager for Corporate Affairs

at Banco de Credito del Peru.

nicolAs munozInvestment Attraction Officer of the

Foreign Investment Committee of Chile

in Santiago de Chile.

tomAs bulAtProfessor of Economics in MBA

programme at UADE and Host-

Producer, El Inversor at America TV.

mAriAnA ferreirAHead of the Competitive Intelligence

Unit, Institute Uruguay XXI in

Montevideo, Uruguay.

abOut thE authOrS

This publication is the result of an ‘airport economist’ style speaking tour to the major Spanish-speaking economies of Latin America over late 2012 and early 2013 initiated by Australia’s former Ambassador to Mexico, Katrina Cooper, who was ably assisted by Ms Rachel Moseley.

After Katrina returned from post,

Rachel kindly co-ordinated my visit

and I was hosted in Mexico City by

Katrina’s successor, Ambassador Tim

George, who has made an important

contribution to the publication. As well

as Mexico City, I was also hosted by

the Australian Embassy’s excellent staff

and their Austrade colleagues in Mexico

City, Bogota, Santiago, Lima, Buenos

Aires and Montevideo.

The aim of the visit was to raise

Australia’s economic and education

profile in Latin America, through

speaking engagements, media

appearances on TV and in print and

social media and also, by means of

this publication, to tell Australian

audiences more about Latin America.

Some of my own observations of

individual Latin American countries

were published during my visit and will

appear in my forthcoming book Trading

Places – The Airport Economist’s

guide to International Business (New

South Publishing – UNSW Press), so I

thought this publication would be well

served by inviting six distinguished

economists to tell the story of their own

countries. Accordingly, I would like to

thank my co-authors for their excellent

contributions.

Whilst the views expressed are those

of the authors alone, my trip was

well supported by the diplomatic

community in both Australia and Latin

America so thanks are due to the

Ambassadors:

• Ms Patricia Holmes, Ambassador

to Argentina, Uruguay and Paraguay

• Mr Tim Kane, Ambassador to Chile

• Mr Tim George, Ambassador to

Mexico

• Mr John Woods, Ambassador to Peru

• Mr Crispin Conroy, Consul-General

to Colombia

• His Excellency, Mr Pedro Raul Villagra

Delgado, Ambassador Extraordinary

and Plenipotentiary, Argentina

• Mr Carlos Moran, Charge d'Affaires

a.i. (Republic of Chile)

• Her Excellency, Dr Clemencia Forero-

Ucros, Ambassador Extraordinary

and Plenipotentiary, Republic of

Colombia

• His Excellency, Mr Armando Alvarez

Reina, Ambassador Extraordinary

and Plenipotentiary, Mexico (and his

predecessor Beatriz Lopez Gargallo)

Acknowledgements

• His Excellency, Mr Luis Felipe

Quesada Inchaustegui, Ambassador

Extraordinary and Plenipotentiary,

Republic of Peru

• His Excellency, Dr Ricardo Javier

Varela Fernandez, Ambassador

Extraordinary and Plenipotentiary,

Uruguay

And to the staff at DFAT and Austrade

in Latin America, including: Fernando

Perez Tain (for help with translation),

Magdalena Luppi, Norma Ramiro,

Dan Sullivan, Daniel Havas, Carolina

Miyagui, Chris Rodwell, Radek Divis,

Adam Coin, Monica Ramirez, Ines

Fernandini, Lisa Davidson, Claire

O’Halloran and Valeria Ortiz.

Referees and supporters in the

Australian Latin American Business

Community included: COALAR Chair

Chris Gale, Bill Repard, Jose Blanco,

Hon. Peter Beattie, Bernard Wheelahan,

Maria Beamond, Adriana Bedon, Zoe

Dauth, Carmen Elena Botto Pasco,

Harris Gomez and Cody McFarlane.

Of course, thanks are due to the staff

in the COALAR Secretariat in DFAT’s

Canada and Latin America Branch,

who as always, were first class in their

professionalism and support for the visit

and the publication.

Claudia Jarjoura, of Jarjoura Design,

a successful Latin American ‘import’ to

Australia, again showed her magnificent

design skills in the creation and lay

out of the publication. Like everything

Claudia does, the product is world class.

Latin Lessons – austraLia and Latin america Face the asian century can be used as a companion to another coaLar pubLication i co-authored with the Lowy institute on braziL titLed Great southern Lands – buiLdinG ties between austraLia and braziL pubLished this time Last year.I hope that with Great Southern Lands,

and Trading Places, that Latin Lessons

will become a useful guide for business,

students and others in the community

wanting to learn more about Latin

America and Australia.

Tim Harcourt

JW Nevile Fellow in Economics,

Australian School of Business, UNSW

& author-host of The Airport Economist

Sydney, Australia

1

contents

reFerences

98

introduction

2

10mexico

24coLombia

42peru

56chiLe 74

arGentina

84uruGuay

LatinLessons

2

Int

Ro

From competition to coLLaboration Australia and Latin America have been separated by geography, culture and their different economic links. Historically, because of their respective colonial ties, Latin America looked to Europe whilst Australia looked to England, and we’ve been in different hemispheric ‘spheres of influence’ ever since.

But things are changing in the 21st century, as Asia and

the emerging markets are on the march and Australia

and Latin America find they have more in common in

the Asia-Pacific century than they have had in the past.

Both continents are resources rich. Both continents

have strong agricultural sectors. Both rely on

immigration in part for their human capital. Both

combine a rich indigenous culture with former colonial

institutions. Both survived the global financial crisis and

the sub-prime crisis largely in-tact.

Whilst in the 20th century, Latin America and

Australia were considered to be distant competitors as

commodity exporters, in the 21st century they are now

working together through intra-industry investment

and technological and management exchange to feed

Asia (particularly China) and supply the region with

industrial raw materials and professional services. Also,

we are both looking to collaborate in international

economic institutions (like the WTO, APEC and G20).

3

By Tim Harcourt

Latin America and Australia also have

strong potential to work together

because we share common values like

openness, democracy, human rights

and the rule of law. In fact, it was our

democratic Parliamentarians who

drove the bilateral relationship and

recommended establishing institutions

like COALAR to provide policy advice

and enhance business engagement.

The Parliamentarians also encouraged

Australia and Latin America officials to

work together and become great allies

in multilateral institutions that govern

the international economy such as

the WTO, APEC and the G20. Classic

examples of this is the co-operation

are the Cairns Group in the GATT/

WTO, spearheaded by Australia and the

agricultural exporting nations of Latin

America and, more recently the G20.

Following the Parliamentarians’ lead,

businesses are now looking to form

similar relationships and institutions as

have been developed in the political

sphere. And naturally, our research and

academic institutions are looking to

complement this with wider and deeper

education partnerships and people

relationships between Australia and

Latin America.

In fact, it is the emphasis put on the

need to strengthen economic and

political institutions that has led Latin

America to look to Australia in the

first place. Many of my Latin American

hosts and guests say that Australia is

the place that Latin America could be

“if it turns out right”. Whilst younger

generations know democracy and

relative economic prosperity, those

leaders in business, government and

community who have experience of

darker times know how economic

institutions are contributing to political

stability, economic prosperity and social

cohesion. And it is Australia’s economic

institutions, not the sunny beaches and

love of sport (that Latin America has

already), that explain why many leaders

in political, business and community in

Latin America aspire to be like Australia.

In this regard, this report has been

influenced by two books: firstly, the

work by two Harvard/MIT scholars,

Daron Acemoglu and James A.

Robinson Why Nations Fail; and

secondly, Ian McLean’s excellent

economic history of Australia, entitled

Why Australia Prospered. Both

works tell us why institutions are so

important in determining a nation’s

future economic prosperity and

political stability.

Acemoglu and Robinson take a journey

through the history of the world to

see why some nations have succeeded

economically and others have been a

disaster even when they had similar

endowments of natural resources,

climate or historical culture. The central

thesis of their argument is that nations

Latin Lessons : Introduction

4

that build inclusive and democratic

political and economic institutions will

do better economically than nations

that don’t. It doesn’t matter if a nation

has an abundance of mineral wealth

and natural resources, because if they

don’t get the institutions right, with

democratic inclusivity, fairness and

the protection of property rights so

citizens have the incentive to invest,

save and innovate, the nation can

squander its inheritance.

McLean’s book tracking Australia’s

economic history stems from his

historical work comparing lands

of recent settlement, in particular,

Australia and Argentina (a comparison

also made by Acemoglu and Robinson

in Why Nations Fail).

A century ago, both Argentina and

Australia (and Buenos Aires and

Melbourne in particular) were two

of the richest place in the world.

But whilst Australia developed

inclusive institutions and resisted

the squattocracy, Argentina allowed

land-owning oligarchs to flourish, with

extractive and exclusive institutions,

which forced the mass of the population

to support Peronist policies. This had

an adverse impact on the historical

development of economic institutions

and the eventual economic performance

of Argentina relative to Australia,

despite both coming from good starting

points in the late 19th century.

Even in recent years, at the beginning

of the 21st century we can see how

economic institutions and their capacity

to allow economic reform still matter

when external shocks affect export-

orientated countries like Argentina

and Australia.

In fact, Australia’s recent economic

success is due to the reform of its

economic institutions. For example,

in opening up to Asia, the Hawke-

Keating Government in the 1980s

brought fundamental reforms such

as the floating of the dollar, reduction

of tariff barriers, the introduction of

superannuation and other domestic

restructuring. This enabled Australia

to prosper in the Asian Century, turning

our historical ‘tyranny of distance’

position into ‘the power of proximity’.

But as McLean shows, the contrast with

Argentina, a similarly resource-endowed

southern hemisphere economy, couldn’t

be greater. Whilst Australia floated the

dollar, enabling the economy to have

a shock absorber whilst we reformed

our economic structures, Argentina

fixed the peso to the US dollar, making

exports too expensive and imports

cheap, which, coupled with debt

and default, destroyed confidence in

Argentina’s institutions and security

in their property rights and banking

system. Now Argentina knows it needs

to rebuild trust and confidence in its

institutions, so it can take full advantage

of its natural resources and highly

educated, sophisticated workforce.

And that is perhaps why Latin

America – particularly Argentina –

has been interested in Australia’s

institutional story as much as our

economic indicators.

5

Of course, even beyond the study of

institutions, when Latin America looks

to engage with Australia, ours is a

straightforward picture as we are an

island continent - a continent for

a nation and a nation for a continent.

But for Australia to look at Latin

America, it is not as simple. Latin

America is such a diverse and exciting

place that we decided in this report

to focus on the key Spanish-speaking

economies that have potential trade

ties with Australia – Mexico, Colombia,

Peru, Chile, Argentina and Uruguay as

we had already concentrated solely

on Portuguese-speaking Brazil in the

companion to this report titled: Great

Southern Lands – Building ties between

Australia and Brazil.

in each chapter a distinGuished economist teLLs the story oF their native Land – its economy, its society, its poLiticaL institutions and the potentiaL For ForGinG trade Links in the asia-paciFic and with austraLia in particuLar.The narrative covers trade and

commercial links in ‘rocks and crops’

(mining and agriculture), manufacturing,

professional services and education,

travel and tourism, as well as the

creative industries.

In the first chapter on Mexico, Jose

Antonio Ardavin, the Director of the

OECD in Mexico City, explains the

chequered 19th Century economic

history of Mexico complicated by its

relationship with the USA (which had

annexed California, Texas, Arizona and

New Mexico). He takes us through the

recent experience of re-establishing

democracy in Mexico in the 2000s,

and the impact of NAFTA, the so called

‘tequila crisis of 1994’ and the 2008

global financial crisis stemming from

the collapse of Lehman Brothers, an

event that hit Mexico particularly hard.

He believes that Mexico has now put

that period behind it and in a new spirit

of openness, democracy, moderate

economic growth and macroeconomic

stability, that the world may experience

‘The Mexican Moment.’ But to fulfil its

potential, Mexico must, he believes,

undertake serious economic reform

in education, human capital, pension

reform, energy reform and competition

– a process that has begun under

President Pena Neito’s ‘Pact for Mexico’

reforms.

For Australia, along with the bilateral

ties in resources, most collaboration

comes in education and human capital

(strong ties in higher education

institutions and technical skills), and

Mexico has been studying Australia’s

Productivity Commission and other

economic institutions. Mexico is a

member of the G20 and would be

a strong player in the TPP if it were

to establish itself in world trade and

Mexico and Australia recently joined

fellow middle power G20 countries

Indonesia, Turkey and South Korea in

Latin Lessons : Introduction

6

the MITKA alliance, showing Mexico’s

pivotal status in Asia-Pacific strategic

economic policy.

Mexico’s size and scale has impressed

the Australian Ambassador to Mexico,

Tim George, who says: “What has really

struck me is Mexico’s significance

globally as a major exporter of

increasingly sophisticated manufactured

goods, its depth of integration into

North American supply chains, and its

enormous economic potential more

broadly. Its sound macro-economic

credentials, the outward orientation

of its economy, its impressive and

far-reaching reform agenda, and its

demographics all mean Mexico is on

a very good trajectory. It will be a top

ten economy before long, and could

go significantly higher.”

In Colombia, world renowned

academic Mario Garcia-Molina

explains the improving economic

performance of Colombia that has

been overshadowed by its drug

cartel and security issues of past

decades. The peace dialogues with

FARC (the main guerrilla movement)

are key to the country’s revival, along

with major investments in the health

system, education and social policies

to reduce inequality. Colombia is an

enthusiastic member of the Pacific

Alliance and APEC and attempting

to escape its past and being overly

tied to an Andean trade bloc alone.

Australian businesses in mining and

education have long considered

Colombia the Latin American economy

with the most potential – given its

outstanding reserves of human capital

with its cohort of highly educated,

sophisticated, services-orientated

young people – and the nation has

made great strides to improve its

National ‘Brand’ status and trade ties

in the Asia-Pacific.

peru is a cLassic exampLe oF the Great improver in the Latin american economic stakes. Pablo de la Flor describes Peru as

‘The Andean Jaguar’ and highlights

its strong growth rates (6.4 per cent

p.a. on average over the decade), low

inflation (averaging 2.5 per cent) and

improving its per capita income stakes

so it has achieved middle income status,

like a hiker reaching Machu Picchu in

record time. Peru’s success is a trading

story not just within the Andean states

and Latin America but also beyond the

continent into Asia (China takes 17 per

cent of Peru’s exports and trade with

Beijing is now more important to Lima

than trade with Washington). Australia’s

contribution to Peru’s success has

mainly been in mining but also in

agriculture, education and tourism

(Machu Picchu is famous but Lima has

become a gastronomical destination

for Australian ‘foodies’). Australian

Business Leader Chris Gale, the

Managing Director of Latin Resources,

has highlighted Peru’s “tremendous

upside as a mining country with

excellent geology, very user friendly in

terms of exploration and the Peruvian

government has been more than helpful

in terms of green fields and resource

definition.”

7

Peru has also pushed APEC and the

Pacific Alliance (being a member along

with Chile, Colombia and Mexico).

Peru’s main fear is that it could run out

of steam after its spectacular growth

and fall into the ‘middle income trap’,

hence its search for new markets in

Asia and the Pacific to maintain rising

living standards.

Chile has of course been the poster

child for Latin American economic

performance for many years and has

kept that reputation as it transformed

itself from dictatorship to a fully-

fledged democracy after a carefully

managed national reconciliation.

As Nicolas Munoz of the Foreign

Investment Committee of Chile points

out, free-trade and an open economy

has been a cornerstone of Chile’s

economic strategy and in many respects

Chile has been the model that other

aspirational nations in Latin America

have been looking to as an example.

As Munoz notes, Chile is an attractive

destination for foreign investors with

many Australian companies like BHP

Billiton and WorleyParsons basing their

Latin American operations in Santiago.

But the question for Chile is, what next?

You can only open your economy once

and only negotiate so many free-trade

agreements with so many countries. In

this regard, ‘Red Hot’ Chile is already

ahead of the game, concentrating on

innovation and investment as well as

trade, making Chile a launch pad for

innovation into third markets. Hence

the importance of the work of CSIRO

Chile in providing mining and minerals

processing technology and training

in Santiago and for Peruvian post-

graduate students in the northern

Chilean mining town of Antofagasta.

The rise of ‘Chilecon Valley’ and other

examples of Chilean innovation is

attracting attention – and investment –

from Australia.

In the chapter on Argentina, high

profile Argentine economist Tomas

Bulat explains the role of economic

institutions in Argentine history and

how economic reform can unleash the

potential Argentina has in agriculture,

viticulture, human capital and education

and even in mining if the institutional

framework were to be improved. Bulat

cautions of the “mood swings” of

the Argentine economy but still sees

‘potential for growth’ if Argentina

follows a more open economy

framework being “respectful of

international rules and agreements.”

Of course, many economic historians

and scholars like Acemoglu and

Robinson and McLean have twinned

Argentina and Australia in terms of

economic development, but what of

Argentine-Australian bilateral ties?

The Australian Ambassador to

Argentina, Patricia Holmes, sees

potential for Australian-Argentine

collaboration and is making higher

education ties a priority so future

generations of Argentines have

exposure and access to Australia in

terms of their professional development

so they can apply these skills in their

home country. Her nominated sectors

for further bilateral collaboration

are primary industry and related

professional services: “The big interest

is in investment and the potential of

mining services; in agriculture, it's

Latin Lessons : Introduction

8

technology, water management

and genetics.”

Finally, in the chapter on Uruguay,

Mariana Ferreira, Head of the

Competitive Intelligence Unit of

Uruguay XXI, tells the economic

story of a nation whose geography

seemed to work against its economics,

particularly at the turn of the 21st

century when its giant neighbour

Brazil suffered a devaluation in 1999

and then Argentina was hit by an

overall economic crisis in 2002.

Despite this setback early in the new

millennium Uruguay has recovered

with a respectable 6 per cent growth

rate (between 2005 and 2012) and

reasonable fiscal and monetary policy

management. Uruguay is an export-

orientated open economy with most

of its foreign investment stemming

from neighbours Brazil and Argentina,

the USA and Europe rather than

Australia and the Asia-Pacific. Had

Uruguay been able to be more like

Chile and not hemmed in by Mercosur

(the trade pact with Brazil, Argentina,

Paraguay and now Venezuela), its

trade and investment story could have

been much different. However, as the

author says, Uruguay is a ‘plucky’ or

‘maverick’ country and has moved

fast in terms of social reform under

its colourful but frugal President.

Progress in social issues, in health and

education, family arrangements and

reducing the digital divide has been

prominent. The strong interest in Public

Private Sector Partnerships (PPP)

has attracted attention and guidance

from Australia as Uruguay attempts

to balance economic prosperity and

social cohesion in how it develops its

national infrastructure assets. Ricardo

Varela, Uruguay’s Ambassador to

Australia, has highlighted resources

and agriculture as potential areas for

bilateral collaboration: “Globalisation is

bringing our regions closer. Uruguay is

starting some mining activities, which

has brought new opportunities to do

business and exchange experiences.

Both countries need to feed the world,

and by sharing this responsibility we

shall work together.”

what is apparent aFter LookinG at each economy in detaiL is that there are diFFerent chaLLenGes FacinG Latin america in terms oF poLiticaL economy. There are the open economies of

Mexico, Chile, Peru and Colombia that

have formed the Pacific Alliance and

are signing trade agreements with Asia

and each other to spread the benefits

of trade and investment to their

population to improve living standards.

Then there are more closed economies

like Argentina which are more

interventionist and populist, running

positions closer to Venezuela. Then

there is Uruguay who given its open

agricultural sector, could perhaps be

more like a Pacific Alliance country but

is constrained by being tied to its larger

neighbours Brazil and Argentina via the

Mercosur trade pact. Accordingly, could

Uruguay combine the strong social

justice focussed policies of its President

9

with the open economy model of its

Pacific Alliance partners?

Overall, the report’s co-authors are

cautiously optimistic about the forging

of stronger ties between Australia

and Latin America, particularly as the

Asia-Pacific region becomes more

influential in the global economy and

international political institutions. Just

as we economists have collaborated to

produce this report on Latin America

and Australia in the Asia-Pacific century,

we hope our respective nations can do

the same thing in terms of trade and

people flows in years to come.

We hope this is a sound start along

that journey.

LatinLessons

10

Throughout its long history, Mexico has

been one of the vital economic drivers

of the American continent. In ancient pre-

colonial America, what we know today as

Mexico and Peru were the most important

economic and trade centres.

This importance was reinforced during the

Spanish colonial period, with New Spain

(as Mexico was called) becoming a relatively

prosperous economy, with important mining,

agriculture and trading industries. During the

colonial period, Mexico’s GDP per capita was

greater than that of the United States. At the

time of Mexico’s independence, in 1821,

that ratio was close to 60 per cent, and has

declined since then towards a level between

20 and 30 per cent (See Figure 1).

The 19th century is a very complex stage

of Mexican history, both in political and

brieF economic history

me

xIc

o

11

By Jose Antonio Ardavin

economic terms. Instability and internal conflicts derived from

foreign intervention and the loss of more than half of the territory

to the United States (what today is California, New Mexico, Arizona

and Texas). However, the century ended with a period of relative

stability, known as the “Pax Porfiriana” whereby the country

established an important railroad infrastructure, created a modern

financial and banking system, and its trade with various nations

of the world flourished. However, growing inequalities and the

urge for a change after a 30-year dictatorship led to the Mexican

Revolution, which again translated into significant economic

losses. From 1920 to 1935, while Mexico started a new period of

institution-building (including, for example, the Central Bank), the

country grew at only 1.6 per cent, driven in part by the significant

impact of the Great Depression on the Mexican economy, which

produced a decline of 12.9 per cent in 1932.

More recently, during a large part of the 20th century, Mexico

had a period of relative prosperity and growth, which was even

characterised as the “Mexican miracle”. During the fifty years

FIGURE 1 : MEXICO’S GDP PER CAPITA IN RELATION TO THE UNITED STATES, LATIN AMERICA AND THE WORLD

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1500 1600 1700 1820 1870 1913 1950 1973 2001

MEX/US MEX/LATAM MEX/WORLD

Source: Maddison A (2001) and OECD (2003)

12

Latin Lessons : Mexico

that followed the recovery from the

Great Depression, Mexico grew at

an average annual growth rate of

6.6 per cent. It was a time of rapid

industrialisation, based on the import

substitution industrialisation (ISI)

model, which many countries of the

Latin American region and other Asian

countries pursued. This was also a time

of significant structural transformation,

with migration from rural areas to urban

areas, and, at least until the mid-70s, a

period of macroeconomic and financial

stability, with a fixed currency exchange

of 12.5 Mexican pesos per US dollar

which lasted for close to 30 years.

At the risk of oversimplifying, it can

be said that the period of high growth

and stability (1950-1970) known as

“desarrollo estabilizador” (stabilising

development) was followed in the

1970s by a period of very high growth

without stability, then in the 1980s,

by a period of low growth without

stability, and finally in the 1990s and

2000s by a period of low growth

with stability1. Let me further elaborate

on this.

By the 1970s, the model of growth

with stability that allowed Mexico to

grow at rates close to 7 per cent per

year, started to show weaknesses. In

particular, most of the low-hanging fruit

of import substitution were already

in place (consumer and intermediate

goods and some capital industries),

but having the economy closed at

a time of important industrial and

technological advances limited the

absorption of technology and created

an overly protected industrial sector

not familiar with external competition.

At the same time, growth was not

sufficiently capable of reducing income

and regional inequalities.

a new strateGy was impLemented then, more Focused on redistribution oF income, increasinG sociaL proGrammes throuGh Greater economic deFicits. Mexico was confident in assuming a

larger debt, to a great extent because

of the very favourable circumstance of

the discovery of the largest oil reserves

in Mexican history, the so-called

Cantarell oil field, which has allowed

Mexico to return to the international

markets as a net oil exporter since

19742. However, the very favourable

external conditions current until then

started shifting radically in 1973 with

the oil embargo and the abandonment

of the Bretton Woods system. This put

Mexico in a very complicated situation,

forcing a large devaluation of more than

60 per cent in 1976, and by the time a

new external shock in the terms of trade

1 The use of this typology, in particular the reference to the last period of Mexico as

“estancamiento estabilizador” (stabilized standstill) could be attributed to Francisco

Suarez Davila. See Suarez Davila (2013). 2 Ortiz, Romero and Diaz (2010) Expansion

Magazine

13

came in the early 1980s, Mexico had no

alternative but to stop debt payments,

initiating the Latin American debt crisis.

Inflation soared and growth

declined significantly, not only

in Mexico but in many Latin

American countries.

A dramatic process of fiscal adjustment

and economic reforms started,

including the opening of the economy

to international trade and the reduction

of the government apparatus through

privatisations. This occurred not only

in Mexico but also in the rest of Latin

America. Mexico was, however, one

of the most active reformers of the

so-called Washington consensus.

The immediate results did not increase

growth levels. The decade of the

1980s, which for the world represents

a revolutionary decade in many

technological, economic and social

respects, is known by many Mexicans

and Latin Americans as the “lost

decade”.

A new wave of hope came in the 1990s,

as Mexico, having regained access

to international financial markets

and earned a good reputation with

a number of important political and

economic reforms, was ready to embark

on a major project, the North American

Free-trade Agreement (NAFTA),

which came to effect at the start of

1994. A number of events, including

the rise of the Zapatista movement

which coincided with the start of the

NAFTA, and the political instability

caused mainly by the assassination of

the presidential candidate of the ruling

party PRI, threatened the economy

again, causing capital outflows

that rapidly depleted international

reserves and reduced the ability of

the government to pay short-term

government debt denominated in US

dollars (Tesobonos). By December 1994,

the international reserves had fallen

from US$27 billion in January 1994

to US$ 11 billion and the outstanding

Tesobonos – all of them due in 1995

– had increased from less than US$3

billion in January 1994 to US$29 billion3.

A new financial crisis, the so-called

Tequila crisis, started on 19 December

1994, with a devaluation of the peso,

initially of 15 per cent (that ended up

at 223 per cent 12 months after), which

unleashed a further capital flight of

US$ 5 billion in just a few days, and

not only put Mexico on the verge

of default, but generated a major

contagion to other Latin American and

emerging economies, becoming “the

first financial crisis of the twenty-first

century.”4 Despite a rapid recovery of

exports after the devaluation in the

context of a favourable international

environment, the crisis generated major

output and employment losses (of 6

per cent and 9 per cent, respectively),

as well as a major loss in real wages

(25 per cent) and had a high fiscal cost

3 Lustig N (1995) 4 While there is some debate, this phrase is usually attributed to

Michel Camdessus. See for example Ortiz Martinez (1998), Fischer (2001), Boughton

(2001).

14

Latin Lessons : Mexico

due to the need to rescue several banks

and financial institutions. Therefore, the

credibility of the reforms implemented

up to the point that was seriously

damaged.

A new wave of hope came in

2000, as the country made a

major step in its democratic

life by electing the first

president from a party other

than the PRI, which had ruled

for the previous 70 years.

Markets responded very favourably

to this achievement, but unfortunately

international conditions changed after

the dot-com bubble burst. While other

Latin American countries managed

to grow at record levels from 2003

to 2008, linked among other factors

to growing Chinese demand and

high commodity prices, the Mexican

economy, so closely linked to the

US industrial cycle and facing tough

competition from China in its exports

to the United States, had a relatively

disappointing 2 per cent average

annual growth, partly because

there was no consensus on major

economic reforms.

The 2008 global financial crisis hit

Mexico quite hard, mainly through

the real estate sector, as result of

its economic integration with the

United States. In 2009, Mexico’s GDP

declined close to 7 per cent. However,

in comparison to previous crises, and

particularly to the one of 1995, the

better macro-economic conditions

allowed the country for the first time in

many years to pursue countercyclical

measures that avoided a massive

decline in employment (4 per cent)

and in the purchasing parity of salaries

(-2 per cent only). Moreover, the

performance of the Mexican economy

since 2010 has been quite remarkable,

with double the rate of growth of OECD

countries and avoiding a financial

or fiscal crisis, as had been the case

for so many other regions. Indeed,

macroeconomic stability finally paid

its dues, and most economic and

political actors recognised its value.

Against this background, and after

having had a second peaceful political

transition, Mexico is experiencing a

new wave of hope. Many observers,

knowing recent Mexican history, insist

on keeping optimism at a moderate

level. With the majority of the Mexican

population having lived in either

a period of crises or a period of

relatively slow growth, there is a young

generation who are sceptical whether

Mexico can ever achieve high rates

of growth and become a prosperous

nation. Nonetheless, a number of

cumulative changes over the past

decades might be starting to bear

fruit in setting stronger foundations

for growth. The next sections provide

an assessment of Mexico’s recent

achievements and remaining challenges,

along with relevant opportunities of

engagement and partnership with a

country such as Australia.

15

At present, Mexico is the 14th-largest economy in the world and is

set to be part of the top ten by 2030 and become the 7th-largest

economy in the world some time between 2040 and 20505.

Mexico is comprised of 32 very diverse states, some as large as

Chihuahua with 247,460 km2, close to the area of New Zealand,

or as populated as the State of Mexico, with around 16 million

people, not very far from being the population of Australia. While

during the past two decades the country has not reached the

high growth rates that other emerging markets achieved, Mexico

has been able to grow moderately in a balanced fashion, gaining

market share in the North American market, expanding its own

consumer market with a growing middle class, and strengthening

its economic and political institutions.

One of the major achievements of the recent decades is

macroeconomic stability. Mexico has maintained fiscal and

monetary discipline since the aftermath of the 1995 crisis. At

present, the country is subject to a floating exchange rate regime

and inflation has been single-digit for close to two decades near

the annual inflation target of 3 per cent with a band of +/- 1 per

cent. This has allowed for a better environment for investment,

with the lowest real interest rates and the longest maturity of

government and private bonds in recent history. On the fiscal

front, all political actors (government, congress and more recently

local governments) have been subject to self-imposed fiscal rules

that leave Mexico today with a much better fiscal position than

many of its OECD and emerging market peers. In addition, over

the past decade, the private and public pension systems have

been reformed, creating a system of individual accounts which has

created a good amount of fiscal space and provided a new source

of funding for long-term investment.

aLL this has contributed to enhancinG the scope oF the FinanciaL market.

5 Goldman Sachs projections, Wilson Trivedi Carlson and Ursua (2011)

the current mexican economy and 'the mexico moment'

16

Latin Lessons : Mexico

% = per cent; e = estimation; * = 2011 figure ;** = 2010 or latest available figure.

Source: OECD (2013), INEGI (2013)

UNIT 2000 2012 */**

DEMOGRAPHICS

Total Population '000 Persons 98 439 110 023

Population Growth Rates % 1.4 0.7

Youth Population Aged Less Than 15 % of Population 34.0 27.0

Elderly Population Aged 65 and Over % of Population 4.7 6.3

PRODUCTION AND INCOME

GDP Bln USD Current PPPs 985.9 e 2012

GDP Per Capita USD Current PPPs 10 034 e 18 288

Real GDP Growth Annual Growth % 6.6 e 3.9

ECONOMIC STRUCTURE

Agriculture, Forestry, Fishing % of Total Value Added 3.3 3.0 *

Industry % of Total Value Added 37.8 36.0 *

Services % of Total Value Added 56.3 60.0 *

SELECTED MACROECONOMIC INDICATORS

Government Deficit % of GDP .. -0.1 *

General Government Debt % of GDP .. 37.7 **

Inflation Rate Annual Growth % 100.0 4.1

Exchange Rate MXN per USD 9.46 13.17

SELECTED TRADE AND FDI INDICATORS

Imports of Goods And Services % of GDP 34.6

Exports of Goods And Services % of GDP 29.1 e 33.0

Inflows of Foreign Direct Investment Mln USD 18 001 8 946

Outflows of Foreign Direct Investment Mln USD .. 19 554

SELECTED SOCIAL INDICATORS

Tertiary Attainment In Population Aged 25-64 % 14.6 17.4 **

Unemployment Rate: Total Labour Force % 2.5 | 5.0

Life Expectancy At Birth Years 74.1 74.4

Infant Mortality Per '000 23.3 13.6 *

TABLE 1 MEXICO : MAIN ECONOMIC AND SOCIAL INDICATORS 2009 AND 2014

17

For example, between 2009 and 2012,

close to 26 Development Capital

Certificates (CKDs) were placed on the

Mexican Stock Exchange (BMV). These

are innovative financial instruments

designed to enable Retirement Fund

Administrators (AFORES) to invest in

private equity infrastructure projects

in the country, for an accumulated

amount of close to 68.5 billion pesos6.

Notwithstanding this, Mexico still

faces the challenge of extending

financial services to large parts of

the population and SMEs which lack

access to these services, and thus

increase financial intermediation as

a lever of the economy, which is still

relatively small compared to other

industrialised and emerging markets.

The country also benefits from a large

demographic bonus which started

approximately in 2006 and will end

towards 2028. During this period, the

dependency ratio (children 0-14 and

elder population over 60 divided by

the working-age population) will be

at historically low levels. At present,

29 per cent of the population are less

than 15 years old and 64 per cent less

than under 35 years7. All these young

people are joining and are expected to

join the economically active population

and increase it from approximately 50

million in 2010 to close to 64 million by

2030 and reach a historic maximum of

around 66 million towards 20428.

6 Promexico. Negocios Magazine III-IV 2013 7 CONAPO (2013), projections for 2013. 8 idem

This is both a window of opportunity

and a challenge, since during the first

years of the 21st century Mexico has

already had to create over 800,000

jobs per annum. This has been a tough

target to reach at the rate of growth of

the economy, and many of these young

people have had to join the informal

market. Informality is very widespread;

according to some measures, half of

the employees in the country have

an informal job and this is one of the

main causes of the low productivity

of the Mexican economy, which is for

many people, including the current

government, the greatest challenge

to tackle. Informality is also linked to

the education system, which, despite

having reached practically universal

coverage in primary education, has

many students who leave the system

during the secondary stage, and the

quality of education has significant

room for development. According to

the PISA 2012 survey, less than 70 per

cent of 15-year-olds are enrolled in

school, and close to half of them (55

per cent in mathematics, 41 per cent in

reading) obtained results considered as

insufficient to perform productively in

the modern working environment.

More recently, the country has

benefited from low energy

prices, linked to the greater

availability of unconventional

gas in the United States.

18

Latin Lessons : Mexico

9 Grupo Huatusco (2004)

This new energy paradigm has provided

a fresh degree of competitiveness for

Mexican industries, building on other

comparative advantages such as its

close proximity to the US market

(see next section). In the energy field,

however, Mexico still has important

challenges to overcome. Although

the country is an oil exporter, in 2013

Mexico produced around 2.5 million

barrels per day, almost 1 million barrels

less than in 2005. Since the energy

industry had been (until very recently)

restricted to the public sector, much

of the investment needed to increase

production capacity, explore new oil

fields in deep waters and exploit the

significant reserves of shale gas that

the country has, it had to compete

with other investment and expenditure

needs of the government. Every

year, between 30–40 per cent of the

revenues of the government come from

the state-owned oil enterprise, PEMEX.

In 2004, a group of Mexican economists

produced a number of ideas about why

Mexico was not growing rapidly enough.

The main factors they identified are

not very different to some of those

already described: low productivity

of investment; an inefficient system of

financial intermediation; a relatively low

use of the advantages of free trade;

a weak internal market; insufficient

creation of formal employment; the

inadequate education system; lack

of equal opportunities; insufficient

technological innovation; a weak

government in economic terms (with

low revenues, strongly dependent on oil

revenue streams) prone to inflationary

financing and with an ambiguous

agenda; lack of capacity to reach

political and democratic accords and

implementing efficient public policies

and weak rule of law9.

Many of these challenges have been

addressed incrementally over the

past decade. Since 2012, however,

it merits highlighting that there has

been a marked change in the last point

referred by this group of economists:

the capacity to reach political and

democratic accords. After having

undergone its second change of federal

government, (with the return of the

centre-left PRI after twelve years of

the centre-right PAN. It is important

to note the fact that neither of these

two parties have governed the capital,

Mexico City, over the past 15 years,

which has been ruled by the left-wing

party PRD) there has been a mature

recognition by the three most important

political parties of the need to advance

a common, transformational reform

agenda.

19

the resuLts have been quite impressive, with a number oF important pendinG structuraL reForms approved by conGress in the past Few months :• The labour reforms, approved during

the transition between President

Calderon’s administration and

President Pena Nieto, significantly

updated labour market regulation

which had been unchanged since

1970. The law establishes new types

of contracts such as temporary and

training contracts, and provides

much more certainty to businesses

and provides better incentives to

workers by establishing a limit to

the cost of unfair dismissal cases,

which due to the extented length of

hearings, could reach extraordinarily

high levels. These changes are

expected to favour young people

and women who faced difficulties in

accessing the formal labour market.

• A constitutional reform of education

and subsequent reforms in

secondary education legislation have

established a new framework for

evaluation, professionalisation and

advancement of teachers in their

careers, as well strengthening the

independence of an existing National

Institute for Evaluation of Education.

In addition, the once strong influence

of the national teacher’s union in

education policy has been limited

to labour related issues. The changes

in this field are still subject to strong

resistance from some of the more

radical teachers. Notwithstanding

this, the greater control of the state

over education policy will strengthen

and facilitate a good number of

reforms previously achieved and

oriented towards improving the

quality of education.

• On competition, in 2010-2011

Mexico passed an important

reform aimed at strengthening the

competition authorities. In 2013,

a new constitutional reform was

passed, along with the reform of

the telecommunications industry,

granting to the competition authority

and to a new telecommunications

regulator, IFETEL, constitutional

autonomy and strong powers to

enforce the law. This will foreseeably

improve the efficiency of markets

and competition in many sectors,

benefiting consumers who, until 2012,

paid prices on average 30 per cent

higher due to high concentration in

many industries. This was particularly

relevant for the telecommunications

sector, which despite incremental

advances, remained very

dysfunctional with a very strong

dominance of a single operator in

mobile and fixed telephony as well

as broadband services. The reform

also intends to promote a more

efficient use of the Mexican spectrum

to increase connectivity rapidly

throughout the country as a means

to enable greater productivity across

sectors.

20

Latin Lessons : Mexico

• More recently, Mexico approved

a major financial reform in

September 2013. This reform is

aimed at broadening access to credit

to a larger proportion of individuals

and businesses, and to promote

greater credit provision incentives

to banks. Mexico’s Central Bank has

estimated that this reform could add

0.5 per centage points to growth in

two to three years.

• A fiscal reform was approved in

October 2013 along with a new

budget that includes a broadened

old-age pension scheme and a

new unemployment insurance

programme. According to many

observers, while the fiscal reform

was not the transformational one

that many expected, it does close

a number of loopholes and simplifies

the income tax system and equalises

VAT rates throughout the country

(the Northern states had a lower

rate). Though many exemptions

remained in this tax, special

consumption taxes were introduced

on flavoured drinks and so-called

“junk” food as a measure to combat

and prevent obesity. A number of

ecological tax measures were also

introduced.

• The energy constitutional reform

approved in December 2013 is a

major breakthrough in Mexican

politics, which, while keeping

the ownership of oil and natural

resources with the Mexican state,

and strengthening the capacity

of its regulatory bodies, ends the

monopoly of the state over the oil

sector and over energy production

and commercialisation. The reform

introduces new contractual schemes

allowing complementary investment

by the private sector into exploration

for oil and natural gas. The reform

also provides for greater autonomy

for the state oil company, PEMEX,

and the electricity company, CFE, to

improve their operations and achieve

greater efficiencies. It is expected

that the entry of private investors

into this sector will add significant

dynamism to the Mexican economy.

Mexico started this battery

of reforms not under the stress

of a recession but while growing

in 2012 at a rate double that

of other OECD countries.

During 2013, a number of factors

diminished its growth, including the

lower-than-expected performance

of the US industrial sector, lower

government expenditure during the first

half of the year linked to the transition

of government during the year, and a

relatively complex year for the housing

sector which faced a new regulatory

environment promoting compact

cities contrasting with their previous

investment strategies in city peripheries.

Despite this situation, markets and

investors are already incorporating

in their analyses positive growth

perspectives for Mexico for the rest of

the decade, as shown by the long-term

GDP growth consensus forecasts (see

Figure 2). The full implementation of the

mentioned reforms will be critical for

maintaining this positive perspective.

The efforts of the country to improve

security and strengthen the rule of law

would certainly reinforce this trend.

21

Mexico is a country in the world that actively takes advantage

of its multiple 'citizenships': it is Latin American in its deep roots,

culture and language, North American in its deep economic

ties with the United States and Canada, and closely linked to

Central America and engaged in the latter's development. It is

also a country of the Caribbean, sharing with these countries the

beauty of its beaches as a worldwide tourist destination, but also

sharing with them the risks of climate change and the challenges

in terms of disaster risk management. It is also a country in the

Pacific basin, increasingly linked to the growth and opportunities

that this region offers. Finally, Mexico takes part in the OECD and

in the G20, and has played a key role in those groups as a bridge

between industrialised and emerging countries.

The opening up and integration of Mexico to the world started

in the 1980s when the country joined the GATT. During that

decade a major transformation occurred in the economy, with

Mexico successfully diversifying its export base from being an

oil-exporting-country, with oil exports representing 80 per cent of

its exports, and turning itself into a manufacturing hub, where by

1995, just one year after NAFTA started, oil exports represented

only 11 per cent of exports (see figure 3, Panel A).

mexico and the worLd

FIGURE 2. LONG-TERM GDP GROWTH FORECAST (DEC 2013)

Source: Consensus Economics Inc. Latin American Consensus Forecasts. Long-term forecasts

(October 2013) Short term forecast (December 2013)

0

1

2

3

4

5

6

7

2013 2014 2015 2016 2017 2018

Brazil Chile Colombia Mexico Peru

22

Latin Lessons : Mexico

NAFTA significantly transformed the

country. The US-Mexican border is one

of the busiest in the world, where USD$1

million in merchandise is traded across

the border every minute and 1 million

people cross every day. As shown in

Figure 3 (Panel B), since NAFTA, trade

has increased in almost every field of

the economy. Agricultural exports more

than tripled, extractive-industry exports

increased six-fold by 2010 and have

been experiencing a new boom, being

twelve times larger in 2012 than in 1994.

However, agricultural and extractive-

industries exports only represented

3 per cent and 2 per cent of total non-

oil exports in 2012, with manufacturing

exports, which have also grown six-fold

during the NAFTA years, reaching

USD$300 billion that year, covering the

remaining 95 per cent.

In that regard, Mexico could be

considered a trade liberalisation success

story. Trade represents 60 per cent

of its GDP and it is now the world’s

14th largest exporter of goods, and

the 35th largest exporter of services.

Mexico currently has trade, investment

and economic co-operation treaties

with more than 40 countries, which

jointly represent 75 per cent of world

GDP10. These impressive changes,

notwithstanding, at least two important

challenges limit the country’s capacity

to take full advantage of that success:

firstly, the benefits of trade have been

strongly regionally localised in the

Northern states; secondly, while the

in-bond “Maquila” industry, which has

been responsible for a great part of

Mexico’s trade success (more than

5.100 production units which represent

approximately 17 per cent of GDP

according to INEGI, and providing

jobs to 2.3 million people), this type

of production tends to generate less

value-creating activity upstream and

downstream in the production process.

Therefore there are wide opportunities

for better integration of Mexican SMEs

into Global Value Chains (GVCs), so

as to improve the productive capacity

of the whole Mexican economy and

produce many of the high-quality

inputs and services required in more

sophisticated parts of production

processes.

The cluster of automotive industries in

Mexico is a good example of the degree

of integration of the Mexican economy

into GVCs and its regional impact in

terms of the creation of a sophisticated

labour pool. Mexico is the world’s

eighth-largest car producer, assembling

3 out of every 100 cars produced

globally11. This industry, which accounts

for 4 per cent of GDP, 20 per cent of

manufactured goods, and 27 per cent

of total exports, is distributed across

the central and northern axis of the

country, with relevant specialisations.

States in central Mexico account for

62 per cent of vehicle production while

Northern states produce 57 per cent

of auto parts.

10 OECD (2012) Getting it Right 11 Figures of the Automotive Industry (AMIA)

and the International Organisation of Motors Vehicles Manufacturers (OICA).

Source ProMexico (2013)

23

% = per cent. Source: INEGI (2013)

PANEL A. STRUCTURE OF MEXICAN EXPORTS (PERCENTAGE OF TOTAL EXPORTS)

19800%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1985 1990 1995 2000 2005 2010 2012

Oil Agriculture Extractive Manufacturing

PANEL B. EVOLUTION OF EXPORTS BY SECTOR BEFORE AND AFTER NAFTA (1994=100)

0

200

400

600

800

1000

1200

1400

TotalOilAgricultureExtractiveManufacturing

1980 1985 1990 1995 2000 2005 2010 2012

24

Latin Lessons : Mexico

Five States (Puebla, Coahuila,

Aguas Calientes, Sonora and

Estado de Mexico) produce

close to 75 per cent of light

vehicle production (cars, SUVs

and pick-up trucks).

The cluster is composed of 19

assembly plants and more than 300

tier 1 suppliers for leading companies

worldwide, located in the same states

or neighbouring states where large

auto manufacturers have their plants.

The Mexican automotive industry is

expected to continue growing at an

annual rate of 6.8 per cent until 2015,

with sales growing at 7.46 per cent

during the same period.

Other relevant high-tech clusters have

been established in Mexico taking

advantage of its relatively large pool of

engineers and technicians. Despite the

previously mentioned challenges in the

field of education, Mexico’s universities

and specialised schools graduate

130,000 engineers and technicians a

year12, more than Canada, Germany or

even Brazil, which has nearly twice the

population of Mexico. The electronics

industry (communication, audio, video

and medical appliances, computers and

semiconductors) and more recently the

aerospace industry are good examples

of high value added industries thriving

in Mexico.

The electronics industry employs close

to half a million people and exported

more than USD$75 billion in 201213.

More than half of the Mexican States

have productive capacity in these

fields, especially in Baja California,

Tamaulipas and Chihuahua. Mexico is

also strong in the home appliances

industry, being the number one global

exporter of fridge-freezers, number two

in washing machines, and the third-

largest exporter of air conditioners,

gas stoves and electric water heaters,

and other similar goods14. Mexico's

Aerospace industry, for its part, was

established just one decade ago, and

has evolved at a fast pace, with a 20 per

cent average growth rate since 2004,

from manufacturing simple parts and

assemblies to larger scale production

of turbines, fuselage, harnesses and

landing gear, among other products;

and it has become the sixth-largest

provider to the US market and the 14th-

largest worldwide, reaching a volume

of exports of USD$5.04 billion. In 2012,

there were 270 aerospace companies

established in Mexico which in that year

alone created 32,000 jobs, mainly in the

two important hubs of the industry,

Baja California and Queretaro15.

12 Association of Universities and Higher Education Institutes (ANUIES, for its

acronym in Spanish) 13 Promexico Negocios Magazine September 2013 14 idem 15 Promexico Negocios Magazine, May 2013

25

FIGURE 4. SPECIALISATION IN THE AUTOMOTIVE INDUSTRY

Panel A : 1980 State Level Panel B : 2003 Municipal Level

LQ<1 1<LQ<2.5 2.5<LQ<5 LQ>5

LQ=Location Quotient, calculated on the basis of value added

Source: Own calculations based on INEGI Economic Census Data

TABLE 2. MEXICO’S NON-OIL AND TOTAL TRADE BALANCE FIGURES BY REGION (JAN-SEP 2013)

Source: Banco de Mexico

TOTAL

North America

United States

Latin America

Europe

Asia

China

Oceania

Australia

NON-OILEXPORTS

244,103

200,527

193,498

18,690

11,684

10,516

4,141

844

754

TOTALEXPORTS

281,311

227,729

220,010

19,446

17,181

13,715

4,799

845

754

NON-OILIMPORTS

252,577

120,855

113,981

10,292

32,215

87,304

44,838

713

410

TOTALIMPORTS

284,188

146,705

139,561

10,749

35,667

88,555

44,991

714

410

NON-OILBALANCE

-8,474

79,672

79,517

8,397

-20,531

-76,787

-40,697

131

345

TOTALBALANCE

-2,877

81,023

80,449

8,698

-18,486

-74,840

-40,192

131

345

26

Latin Lessons : Mexico

beinG a neiGhbour oF the LarGest market in the worLd has beneFited the country and deveLoped cLose industriaL ties to the north american market. Notwithstanding this, Mexico has been engaging in important

efforts to broaden the range of its exporting partners. It has signed

a free-trade agreement with Europe that came into force in 2000,

and while Mexico has had a deficit of around USD$20 billion

with Europe over the past 5 years, it is making efforts to increase

exports to the region and FDI from the EU reached an all-time

high of USD$16 billion during the first half of 2013. Trade with Latin

America has significant growth potential. Mexico exported USD$19

billion to the region during the first 9 months of 2013, practically

doubling the figure of imports from the region. The recent creation

of the Pacific Alliance is a major breakthrough, intended to create

a single market for goods, services, capital and people between

the four member countries that account for 35 per cent of Latin

American and Caribbean GDP and 36 per cent of its population.

With Asia, Mexico has registered a deficit of between USD$65 and

USD$95 billion over the past five years, linked mainly to a large

trade deficit with China, which reached USD$40 billion during the

period January–September 2013.

The prospects also look bright in light of the promising future

of the Trans-Pacific Partnership negotiations, of which Mexico

is a part.

mexico’s Future and areas oF possibLe partnership with austraLiaThe context described above sets out very concrete opportunities

for the relationship between Mexico and Australia to strengthen.

Mexico’s trade with Australia has been growing in the past five

years. The volume of Mexican exports to Australia almost doubled

from 2007 to 2012, reaching USD$1 billion in that year. Imports

from Australia also grew to a lesser degree from USD$785 million

in 2007 to USD$984 million in 2011 and USD$934 million in 2012,

the first year in which the Mexican-Australia trade balance turned

from deficit to surplus.

concLudinG thouGhts

27

Source: INEGI (2013)

PANEL A. MEXICO–AUSTRALIA TRADE BALANCE (MILLION USD)

400

500

600

700

800

900

1000

1100

2007 2008 2009 2010 2011 2012

EXPORTS IMPORTS

PANEL B. FOREIGN DIRECT INVESTMENT FROM AUSTRALIA IN MEXICO (MILLION USD)

0

20

40

60

80

100

120

140

2007 2008 2009 2010 2011 2012

Source: INEGI (2013)

28

Latin Lessons : Mexico

There is, however, a vast opportunity

for Australia to deepen its ties with

Mexico, in particular through foreign

direct investment, which has declined

from USD 134 million in 2007 to only

USD$9.6 million in 2012.

besides trade and investment, mexico and austraLia have synerGies to expLoit in various domains.Australia went through a major

transformation of its economy during

the 1990s, similar to the one that Mexico

is undergoing right now. Indeed, the

case of Australia’s regulatory and

competition reforms and the role

played by the Australian Productivity

Commission have been brought to

the attention of Mexican policymakers

on several occasions. The last OECD

Economic Survey on Mexico mentions

this opportunity of sharing experiences,

given that Mexico set as a major policy

goal in its National Development

Plan 2013–2018 the aim of increasing

productivity and creating a productivity

commission.

Productivity and skills are deeply

related. The experience of the

Australian Workforce and Productivity

Agency (AWPA) and its 2013 National

Workforce Development Strategy would

be of critical relevance for Mexico

to upgrade the skills of its young

population. Universities in Mexico have

been adapting themselves to the new

realities and new fields of expertise.

For example, Mexico already has 21

institutions that offer 52 programmes

for the recently created aerospace

industry. Increasing student exchange

programmes between the two countries

could extend the technical skills offering

and would also contribute to reducing

the knowledge gap between these two

countries. In addition, both Australia

and Mexico have vast territories and

dispersed population. Collaboration

and exchange of best practices in the

field of regional development would be

very pertinent.

Finally, a recent initiative that brings

Mexico and Australia together is

MITKA, a country grouping that

gathers together Mexico, Indonesia,

Turkey, South Korea and Australia.

All of them are G20 countries, have

democratic constitutions and open

economies. An initial meeting of this

group took place in 2013 and two more

meetings and a joint declaration are

expected to occur in Mexico in 201416.

This could be the beginning of a long

standing partnership, not only to

prosper together but to find national

and international solutions to common

challenges.

16 World Bulletin (2013)

29

LatinLessons

29

With a GDP of USD$369.789 billion in 2012, Colombia has the 28th-largest economy in the world, and has held this position for more than a decade. Colombia’s per capita GDP of USD$10,110 places it 72nd in the world, and in the group of middle income countries.

It actually moved from low- to upper-middle income in

the World Bank’s classification in a couple of decades. The

Colombian economy is the fourth-largest in Latin America,

after Mexico, Brazil, and Argentina, and its main feature

is stability. Over the long run, the economy has grown at

an annual rate of 3.7 per cent. While Colombia has not

experienced the spectacular growth of others, not having

surpassed 6 per cent in any single year, it has had negative

growth only once during the last 70 years. Colombia has

had neither high nor hyper-inflation episodes for over a

hundred years.

co

lo

mb

IA

By Mario Garcia-Molina

30

Latin Lessons : Colombia

During the second half of the 20th Century, the Colombian

economy underwent an industrialisation and modernisation

process while experiencing a persistent scarcity of foreign

currency, which was cushioned by exports of coffee and,

to a lesser extent, oil. However, during the last two decades,

the country has experienced structural changes that will create

opportunities and uncertainties for the decades to come.

During the first half of the 20th century, Colombia was a rural,

agricultural country with a single dominant product, coffee,

which accounted for two-thirds of exports. 60 per cent of the

population lived in the countryside, life expectancy was around

44 years, and birth and mortality rates were high.

By the 1970s, the country had undergone dramatic changes.

It had become an urban country with two-thirds of the population

living in cities. Mortality rates had fallen, while birth rates had

halved, thanks to a very successful birth control program and

increased urbanisation. The fall in the birthrates in Colombia during

the 1960s is still one of the sharpest on record worldwide.

Protectionism and a mild ISI policy (import substitution

industrialisation) helped build light industry during the 1960s,

which was mainly geared to the local market. In addition to its

normal role in monetary policy and as a lender of last resort, the

central bank (Banco de la Republica) also functioned at that time

as a development bank that allocated resources according to

considerations of employment and growth. Industry accounted

for 23 per cent of GDP, while agriculture had declined to 22 per

cent. By contrast, the diversification of exports was a slower

process. In the 1970s, it became clear that the limits of the ISI

policy were being reached. Regional integration was used in order

to increase the size of the market. However, the 1980s brought the

debt crisis in Latin America and the collapse of the international

coffee agreement, all of which affected exports. By the end of

the 20th century, coffee was still important, but had definitely

lost its hegemonic role. Exports were still highly concentrated,

with eight items accounting for 80 per cent of exports: oil, coffee,

coal, bananas, flowers, food and drinks, garments, and chemical

products. In addition, Colombia’s exports were mainly primary

products.

a short economic history oF coLombia

31

baLance oF payments constraints were a constant probLem throuGhout most oF the 20th century, except in some boom episodes. The economy was adapted to the

scarcity of foreign currency by means

of crawling peg and exchange controls.

Nevertheless, commodity price

spikes caused severe imbalances and

inflationary pressures. Indeed, coffee

booms caused Dutch disease in the

1950s and mid 1970s. Marijuana and

cocaine booms caused similar economic

problems from the 1970s.

Despite the difficulties, Colombia

enjoyed stable, if modest, performance.

Its rate of growth was almost identical

to the average among Latin American

countries throughout the century, but

with narrower oscillations. Colombia did

not suffer the acute crises that affected

the rest of the continent. The fall in GDP

of 1998 has been the only one since

the 1930s. In addition, the country has

not had high or hyper-inflation since

1903. The aforementioned stability is

due to a cautious approach to policy.

Colombia followed the widespread

trends of industrialisation by import

substitution in the 1950s and 60s, and

liberalisation in the 70s and 90s, but

avoided some of the extremes of these

tendencies. The size of government

was kept under control, and debt (both

foreign and internal) was maintained

at a sustainable level, Colombia being

the only country that did not have to

reprogramme its foreign debt during

the 1980s Latin American debt crisis.

Inflation was recurrent during the

second half of the 20th century,

although, again, it was fairly stable

(between 14 per cent and 25 per cent

per year for several decades). This

stability allowed an inflation-linked

long-term mortgage system to work

well. In fact, the highest inflation figure

in recent decades, an annual rate of

30 per cent in 1991, compares well

with 40 per cent or more per month in

several other Latin American countries.

Like Brazil, Colombia learned to live

with inflation by adapting its institutions

to deal with it. Unlike Brazil, the fact

that Colombian inflation was tolerable,

not high, meant that there was a wider

scope for these institutions to work,

because potential maladjustments were

smaller and somewhat easier to handle.

A crawling-peg exchange rate system

(with a devaluation rate similar to

the inflation rate) kept the income

of exporters relatively constant. The

coffee growers’ syndicate had a say in

decisions, which avoided an extreme

anti-agricultural bias.

There was a political side to the

economic stability. Colombia

had neither populist regimes

nor military dictatorships,

though there was a brief period

of rule by a military junta in the

1950s, before elections were

quickly called.

32

Latin Lessons : Colombia

A bipartisan system has been predominant since independence.

Elites have managed to maintain control of the country by means

of a clientelist political system that has provided favours to some

groups of voters to win elections, but at the cost of maintaining

inequality. Colombia ranks among the countries with the greatest

inequality in Latin America, as measured by the Gini coefficient.

As a result of this persistent inequality, and without the escape

valve of increases in salaries and prices (as in countries with

populist regimes), armed conflict also became a persistent factor.

Colombia is the only country on the continent that has had an

active guerrilla movement for half a century.

Unemployment has traditionally been high, rates of 9–10 per

cent being the norm, with peaks during periods of crisis, such

as the mid- 1980s, of up to 15 per cent, and 1999, when the rate

reached 20 per cent for two years. The recent tendency in both

unemployment and inflation has been downwards.

After a period of slow growth (the Latin American “lost decade”)

in the 1980s, and violence related to the war against drug cartels,

there were major changes in the early 1990s.

Following a peace process with one of the guerrilla movements,

elections were called for a Constituent Assembly, which drafted

a new Constitution. This was a major breakthrough, as the

Constitution had remained basically the same since 1886, and did

not acknowledge several rights. The 1991 Constitution declared

that the country was a social state governed by the rule of law. It

introduced mechanisms to guarantee human rights and broaden

decentralisation, and declared the independence of the central

bank. The government started a program to open and liberalise

the economy, privatize government enterprises, and reduce

inflation. The liberalisation of markets (banking) and privatisation

of public utilities (particularly electricity and telecommunications)

and the health sector, by the adoption of reforms similar to those

previously introduced in the UK and Chile, led to a state more

concerned with regulatory issues and less involved in the actual

production and provision of goods and services. This coincided

with increasing capital inflows to Colombia, some of which took

the form of foreign direct investment in the privatised sectors,

mining, and energy. In the meantime, industry has shrunk.

Some sectors have expressed concern, as the economy seems

to be becoming a service economy without having been through

a strong industrial phase.

the medium-term outLook

33

COMPOSITION OF INDUSTRY 2000-2010

11.9% Oil Refining

8.6% Other Chemicals

8.6% Drinks

5.4% Milling, Starch, Starch Derivatives, Animal Food

4.6% Basic Chemical Substances

4.4% Non-metallic Mineral Products

4.3% Plastic Products

3.9% Processing And Conservation Of Meat And Fish

% = per cent. Source: World Bank, DANE, CIA World Factbook, Fedesarrollo

3.7% Basic Iron And Steel Industries

3.7% Paper And Cardboard Products

3.4% Dairy Products

3.3% Other Food Products

3.1% Clothing

2.4% Fruits, Vegetables, Oil, Fat

THE INDUSTRIAL STRUCTURE OF COLOMBIA AT PRESENT SHARE OF GDP

% = per cent. Source: World Bank, DANE, CIA World Factbook, Fedesarrollo

Agriculture

Industry

Services

6.8%

38.1%

55.1%

34

Latin Lessons : Colombia

ANNUAL GROWTH OF INDUSTRY SUBSECTORS 2000-2010

Food

Drinks and Tobacco

Textiles and Shoes

Wood, Paper and Others

Oil Refining

Chemicals and Metals

Machinery and Equipment

2.6%

2.8%

5.9%

5.0%

1.6%

5.6%

8.0%

% = per cent. Source: World Bank, DANE, CIA World Factbook, Fedesarrollo

GENERAL INDICATORS

GDP (PPP)

GDP Real Growth Rate 2012 (Estimate)

GDP Real Growth Rate 2011

Investment (Gross Fixed) 2010

Budget Deficit (-) (2012 Estimate)

Public Debt (2012 Estimate)

Annual Inflation Rate (CPI) (2012)

Annual Inflation Rate (CPI) (Nov 2013)

Unemployment (Oct 2013)

Life Expectancy

Commercial Banks Prime Lending Rate (31 Dec 2012)

USD $369,789,000

4%

7%

56

-0.5% of GDP

40.2% of GDP

3.2%

1.76%

7.8%

74

12.7%

% = per cen. Source: World Bank, DANE, CIA World Factbook, Fedesarrollo

35

The shift to a more liberal economy

increased volatility and reduced average

growth. While it had been growing

at a rate of 4.5 per cent in the period

1970-1990, the economy only grew at

an average rate of 3.6 per cent between

1992 and 2012. Even if the crisis year of

1999 is not counted, the average rate

is still lower (4.0 per cent) than in the

previous period.

Colombia embraced free-trade in

some sectors, but at the same time it

promoted biofuel production by means

of 1960s-style subsidies for oil palm

and sugar cane. It should be noted that

the ownership of these crops is highly

concentrated. The increase in biofuel

agriculture was a move toward a cleaner

economy, but has also raised concerns

about food security.

Since the 1960s, Colombia had had

a crawling peg exchange system.

Between 1994 and 1999, in accordance

with the opening and liberalisation of

the economy, an exchange rate band

was adopted. After resisting several

speculative attacks on the band that

caused high interest rates, the central

bank decided to adopt a floating

exchange rate, which operates at

present.

Also, during the 1990s,

restrictions on capital flows

were reduced, and exchange

control was eliminated, leaving

only a tax on foreign debt

(similar to the one in Chile).

The central bank began targeting

inflation, and by the end of the 1990s,

it had been reduced to single-digit

figures. Although the central bank has

claimed the credit for this, and did

certainly manage to reduce inflation

from 30 per cent in 1991 to 18 per cent

in 1999, the main reduction took place

in that year, 1999, when it fell from

18 per cent to 11 per cent. Thus, it

can be argued that the crisis of 1999

played a role. Nevertheless, inflation

has remained under control since

then. During the past few years it has

remained between 2 per cent and 4 per

cent. By the end of 2013, it had reached

its lowest level in more than 50 years

(1.76 per cent). At the same time,

unemployment has been falling, from

a peak of 11.5 per cent in 2009. By the

end of 2013, it had hit its lowest level

in more than a decade (7.8 per cent).

The large size of the country, its

difficult topography, and persistent

inequality and poverty made the

guerrilla rebels resilient. However,

in general terms, open conflict

was confined to specific areas of

the country, the rest of the nation

continuing with business as usual.

A series of export booms, coffee in the

1970s, marijuana and cocaine in the 80s

and 90s, and later oil and coal, have

caused persistent real appreciation,

which has put industry in a difficult

spot. Growth is now heavily based on

mining and energy (coal, oil, ferronickel,

gas, gold, and others), which has

brought environmental problems and

Dutch disease.

36

Latin Lessons : Colombia

In the Global Competitive Index calculated by the Global

Economic Forum, Colombia ranked 69th in the world and seventh

in Latin America, after Chile, Panama, Brazil, Mexico, Costa Rica

and Peru.

The index classified Colombia as an efficiency-driven country.

According to the report, the five most problematic factors

for doing business in Colombia were corruption, inefficient

government, bureaucracy, inadequate supply of infrastructure,

and difficulties in access to finance. With regard to institutions,

the main problems had to do with security issues, namely the

business costs of terrorism, crime, and violence, as well as with

organised crime and diversion of public funds. At the same time,

protection of investment was very good.

In terms of infrastructure, the main problems have to do with the

quality of roads and ports, while the strengths were related to the

availability of air travel and freight and the quality of the electricity

supply. It should be noted that Colombia has a very diverse

topography. For instance, looking at just the four main cities,

Bogota is at an altitude of 2,600 metres above sea level, Medellin

at 1,495m, Cali at 997m and Barranquilla is located at sea level.

In addition, the tropical weather with rainy and dry seasons,

and with wide changes in

temperature within one single

day has been an obstacle to the

integration of the territory, as

landslides are common during

the rainy season. Different

altitudes, difficult topography

and challenging weather

conditions have made it difficult

to create communication links

the main cities on land.

It is no accident that

one of the oldest

commercial airlines in

the world (Scadta, now

Avianca) was created

in Colombia in 1919 in

order to carry the mail

between Barranquilla

and Bogota.

key poLicy issues

37

Since the trade liberalisation of the

1990s and the free-trade agreement

with the US, there have been initiatives

to improve port and road infrastructure,

although the results are materialising

slowly. In contrast, telecommunications

infrastructure is changing rapidly.

An ambitious plan to increase the use

of the internet has tripled the number

of municipalities with an optical fibre

backbone. "Online government"

constitutes an already established

program to manage official paperwork

online that is considered as the leading

Online Government Program in Latin

America. In addition, the country

introduced 4G mobile broadband

technology in 2013.

the macroeconomic environment, particuLarLy its Low inFLation and hiGh credit ratinG, is one oF coLombia’s strenGths. One of the main policy problems

related to competitiveness has been

real appreciation. The central bank has

tried to intervene, buying dollars from

time to time during recent years, but

has not been able to reverse the trend.

Industrial exports have suffered, but it

is hard to see an easy solution for this

problem in the face of incoming capital

flows and mining exports.

With respect to human capital, there

are problems with health due to the

number of cases of malaria, and the

business impact of tuberculosis and

HIV/AIDS. The incidence of tuberculosis

had been decreasing in the second

half of the 20th century, thanks to the

improvements in the living conditions

of workers, but an increase after 1997

has been linked to internal forced

displacement. Another factor is a

trend of increasing bacterial resistance

to drugs.

Education shows once more the

particular kind of inequality typical

of the country. Enrolment in primary

education is low and has quality

problems, while enrolment in

higher education is high. A good

higher education system allows fast

absorption and adaptation of the latest

technologies, which has an impact on

innovation and productivity despite

deficiencies at the lower levels. For

instance, two Colombian researchers

developed one of the first successful

pacemakers in the world in 1958; and

research done in Colombia played a key

part in the development of a vaccine

for cervical cancer, that led to a 2013

Nobel Prize.

A current policy challenge is the

reform of the health system. The

market system created in the 1990s

had two different benefit plans: one

for workers and employers, and a

different one for informal workers, the

unemployed, and the homeless, which

introduced yet another inequality.

In 2008, the Constitutional Court

ordered the government to unify the

plans, and consequently changes were

implemented during the following years.

However, corruption scandals, as well as

problems with the provision of services,

have led to a debate on whether it is the

system itself that should be changed.

38

Latin Lessons : Colombia

There is still no consensus in this

debate.

Part of the problem with the health

service has to do with high-cost

diseases. As Colombia had a third-party

payer (the government), some health

industry companies took advantage

of the situation to fix higher prices

for Colombia. The result was that

various pharmaceutical prices were

higher in Colombia than in European

countries. However, a threat to import

of medicines from countries where

the same company was selling them

cheaper did force a reduction in several

prices. Recently, there have been

attempts to include a cost/benefit

analysis in the decision-making process,

and a system similar to NICE (the British

National Institute for Health and Care

Excellence) was created. Furthermore,

Colombia has a small but growing

industry of health tourism as some

complex treatments, and dental

services are available at lower

prices and yet are of high quality

by international standards.

the current peace taLks with the main GuerriLLa movement (Farc) have advanced Further than at any previous time. This opens a window for a peace

process that might unleash the

country’s potential. For instance,

biodiversity in Colombia ranks among

the greatest in the world, indicating

good possibilities for tourism and

bio-products. It goes without saying

that a reduction in kidnapping

would dramatically improve investor

confidence. If the talks are successful,

several challenges will emerge, such as

the re-integration of former rebels into

civil society, and their participation in

politics, which is a controversial topic.

In order for Colombia to make peace

permanent, the country will need to

find a way, not only to grow faster, but

also to reduce inequalities and improve

standards of living in both rural and

urban areas. A recent strike by small-

scale farmers demonstrated that the

rural situation is a pressing issue.

Colombian biodiversity is second only

to that of Brazil. As mining became an

engine of growth, controversy arose

about its environmental implications.

Part of the problem is illegal mining,

carried out by very poor people under

unsafe conditions. However, it has

also been argued that legal mining is

affecting the ecosystem. This is an open

debate, but the effects of Dutch disease

make the question even more urgent.

39

After the Cartagena Agreement in 1969, Colombia was, for

several decades, a member of the Andean Pact trade bloc, which

included Peru, Ecuador, Venezuela, and, for a few years, Chile.

The Pact was a strategic trade agreement that attempted to

achieve common industrial policies and make the most of industrial

complementarities, but faced difficulties because industrialisation

by import substitution was the main concept behind development

policies in all countries. The main difficulty at the time was

matching protectionism with integration. The Andean Pact had

relative success and its member countries became an important

market for Colombian manufactures. However, its limits were soon

evident and the 1982 debt crisis reduced trade in the area.

The rise of Mercosur, an economic

and political agreement between

other South American nations

made in the 1990s, gave new

impetus to Andean integration, this

time under the name of the Andean

Community. The fundamental

difference between this agreement

and the Andean Pact was that

now the integration was about

a liberalisation, with Peru and

Colombia signing free-trade

agreements with the USA in 2006

(although Colombia’s agreement

was only implemented in 2012).

Venezuela promoted a different

kind of Latin American integration,

without the USA, and eventually

left the Andean Community.

After the collapse of the ALCA negotiations aimed at creating a

free-trade area which would cover the whole American continent,

Colombia followed a strategy of bilateral free-trade agreements,

first with the USA, and then other countries and the European

Union. More recently, Colombia has looked to the Pacific region,

becoming a member of the Pacific Alliance (see below) and

signing a free-trade agreement with South Korea.

internationaL trade and business ties

While Venezuela is

still an important

consumer of

Colombian

manufactured

goods, trade

relations have

been strained and

irregular, as they

have been affected

by political relations

between the two

countries. These

relations have,

however, recently

tended towards

normalisation.

40

Latin Lessons : Colombia

concerninG Free-trade aGreements, coLombia’s short experience has shown that there is a need to Learn From past mistakes and to make adjustments, such as in the case oF smaLL Farmers unabLe to Grow their own traditionaL potatoes because they were no LonGer LeGaL.Colombia is member of the Pacific

Alliance trade bloc, along with Chile,

Peru, and Mexico. The Alliance was

initiated in 2011 with an orientation

towards Asia. Besides free trade among

its members (supported by bilateral

agreements), it aims to develop a

visa-free travel zone and a common

stock exchange. Central American

countries, Paraguay and the United

States have shown interest in joining.

One seed of this Alliance was the 2009

agreement to create a common stock

exchange uniting those of Chile, Peru

and Colombia, as well as Mexico in

2014, which would make this a USD$1

trillion stock market. Australia and New

Zealand are Pacific Alliance observer

countries (i.e. interested).

A frequently forgotten chapter

in the history of international

ties is energy integration.

Colombia and Ecuador built

a market for international

transactions that takes

advantage of complementary

weather systems.

Hence, during its dry seasons,

Colombia imports electricity from

Ecuador, and sells to Ecuador during

the latter country’s dry season. This

lowers prices, makes the grid more

robust, and diminishes CO2 emissions,

as it reduces dependence on thermal

power generation (based on coal and

other fossil fuels). Colombia has made

advances in future interconnection

with Central America and the rest of

South America and is a member of CIER

(Commission for Regional Energy

Integration, a diplomatic and corporate

organisation for Latin America and the

Caribbean). Furthermore, Colombia,

Ecuador and Peru have signed an

agreement adopting regulatory

principles for the operation of

international transmission lines, as well

as for the management of international

transactions. This is a slow process,

as it requires the building of physical

(e.g. transmission lines) as well as

institutional (e.g. regulation)

infrastructure, but it has been advancing

steadily.

Another energy project was to be the

building of a polyduct pipeline

to transport hydrocarbons from

Venezuela to the Pacific coast, the idea

being to open the Pacific market for

Venezuelan oil and gas products and

break the USA's dominant position

as Venezuela’s main customer for

these products. This idea has not been

realised, due to both external and

internal political factors.

41

Colombia has managed to diversify its export markets, but

basically with the same products as before. Moreover, Colombia’s

main exports have low technological content, i.e. they are

commodities.

aLthouGh the mininG and enerGy boom prevented coLombia From suFFerinG the eFFects oF the internationaL crisis, the main chaLLenGe For coLombia is to increase other exports, particuLarLy industriaL ones and those reLated to speciaLised services (e.G. heaLth, enGineerinG). In this respect, the loss of the Venezuelan market was particularly

damaging for Colombian exports, which had been made up of

value-added products with a certain level of technology, for

example clothing, chemicals, leather, textiles, paper, food, and

vehicles, rather than raw commodities.

An important input for the country’s development would be

a successful peace agreement. If achieved, this would enable

the economy to realise its full potential. However, any stable

peace would require the reduction of inequality. Colombian

macroeconomic stability would then provide a good basis for

sustained development.concLusion

LatinLessons

the andean jaGuarPeru is one of the most successful economic performers in the developing world, registering average growth rates of 6.4 per cent per year in 2002-2012, with the lowest inflation in Latin America (2.5 per cent per year), a healthy fiscal position, low public debt ratios and record high foreign reserves.

Over the last decade Peru has become a middle-

income country, with annual per-capita output

increasing from USD$2,300 in 2000 to USD$6,700

(or USD$10,700 PPP). Unlike previous episodes of

short-lived economic expansion, this time Peru has

experienced accelerated growth while reducing poverty

and improving income distribution. According to the

Inter-American Development Bank, more than half of

Pe

RU

42

43

recent history

the population now belongs to the middle-class, in stark contrast

to prevailing conditions twenty years ago, when a majority of

the population lived below the poverty line. The significance of

Peru’s transformation becomes more dramatic if one considers

that in the early 1990s, the economy was contracting, marred by

hyper-inflation, and under the threat of a bloody internal conflict.

The economic and social turnaround since then has been truly

extraordinary.

Starting in 1968, Peru experienced twelve years of military

rule that brought about the implementation of state-centred

economic development, including the nationalisation of

companies, an interventionist industrial policy, redistribution

of agricultural land, imposition of international trade restrictions,

price controls and the dramatic expansion of public expenditures.

As a result of the policies

implemented and external

shocks, the country experienced

rapid economic deterioration,

with negative economic growth

and crippling inflation forcing

the military to retreat to their

barracks.

Although President Belaunde fully restored civil liberties, he

failed to tackle the critical structural problems that had beset

the economy, leaving in place the distortionary policies earlier

introduced by his predecessors. His administration was further

hampered by the effects of the El Niño, which wreaked havoc

on agriculture, leading to negative GDP growth of 12 per cent in

1982. Furthermore, the new civilian government had to face the

emergence of the Maoist Shining-Path and Tupac Amaru terrorist

organizations. This paved the way for the Aprista party’s victory

in the 1985 elections under the stewardship of Alan Garcia, whose

economic policies further exacerbated the economic crisis and

led to growing fiscal imbalances, expanding current account

deficits and spiralling hyper-inflation (1,600 per cent in 1989).

In the context of a contacting economy (25 per cent output drop

in 1987-1990) and heightened social tensions, terrorist groups

increased their attacks nationwide.

General elections

were called in 1980,

resulting in the return

to power of the same

civilian President

whom the military had

previously ousted.

By Pablo de la Flor

44

Latin Lessons : Peru

the 1990 eLections were won by aLberto Fujimori, who impLemented an ambitious packaGe oF economic stabiLisation and structuraL reForm poLicies that brouGht inFLation under controL and created the basis For resumed economic Growth.His administration privatised public

enterprises, slashed fiscal deficits,

eliminated price controls, and liberalised

the economy more broadly, reducing

administrative red tape and creating

a business-friendly environment.

The new administration also defeated

both terrorist organisations. On the

political front, Fujimori closed Congress

and crafted a new constitution, winning

a second term in 1995.

His efforts to secure an illegal third

term, came to an abrupt end in 2000,

amid a growing corruption scandal

that engulfed the government and led

to Fujimori’s resignation.

The main pillars of the free-market

economic policy framework put in place

in the early 1990s have been maintained

by subsequent governments, with some

small changes and adjustments. Thus,

the government of President Alejandro

Toledo (2001-2006), emphasized the

integration of Peru into the global

economy through the negotiation

of Free Trade Agreements with the

country’s main commercial partners,

a strategy that was also embraced

by the administration of re-elected

President Alan Garcia (2006-2011).

In a reversal of the policies pursued

during his first term in office, Garcia

actively courted private investment,

attracting important FDI flows and

securing record economic growth.

In 2011, former army major Ollanta

Humala was elected President on a

platform of economic change, leading

a nationalist left-of-centre coalition.

However, once in government, like

his predecessors, President Humala

has maintained the existing policy

framework, strengthening social

programmes to reduce poverty.

The drop in mineral prices associated

with the slowdown of the Chinese

economy has led to a moderation

of growth in Peru.

Nevertheless, medium-term

projections indicate the Peruvian

economy will continue expanding

at a robust pace (5.5-6 per cent).

45

The reforms of the early 1990s dramatically transformed the

economy and helped anchor its three key distinguishing features:

trade openness, limited state role, and prudent macroeconomic

management.

This framework was fundamental to unleashing output growth,

which in 1992-2012 averaged 5.4 per cent a year, and 7 per cent

in 2006-2012, one of the four highest in the world for a mid-

sized economy. The country's impressive economic performance

has been driven primarily by private investment and domestic

consumption, which have both experienced a sustained expansion.

The improvement in the country's terms of trade, which in 2012

were 60 per cent above levels reached in 2000 due to higher

mineral prices, has been another contributing factor. Economic

growth has also been fuelled by the “demographic bonus”,

measured as the record number of young workers joining the

labour force in relation to non-working age individuals.

Growth acceleration has been associated with a surge in job

creation. Accordingly, the number of adequately employed workers

more than doubled over the last decade and unemployment

dropped to a record low 6 per cent in 2013. Despite these positive

employment trends, however, underemployment continues to pose

an important challenge. Another outstanding aspect of Peru’s

growth trajectory is its anti-poverty bias. Indeed, the proportion

of the population living below the poverty line plummeted from

55 per cent in 2001 to 26 per cent in 2012. Equally important,

income distribution, as measured by the Gini coefficient, has also

improved (0.45 in 2010).

Economic expansion has taken place alongside price stability, with

inflation averaging 2.4 per cent a year. The independent Central

Bank’s strict handling of monetary policy has played a critical role

in this process. The same is true for the handling of fiscal accounts,

which since 2005 has yielded consistent surpluses. An exception

to this trend occurred in 2009-2010 when small counter-cyclical

deficits were generated to mitigate the negative impacts of the

deteriorating international environment. Budget surpluses of 1.5

per cent and 0.9 per cent were secured again in 2012 and 2013.

As a result of high economic growth and prudent fiscal handling,

public debt has been steadily declining since 2003, when it

reached 47 per cent of GDP. At the end of 2012, total public debt

had dropped to 20 per cent, one of the lowest in the world.

main economic indicators

46

PERU : KEY ECONOMIC INDICATORS

GDP (US$ MM)

GDP Real (Var %)

Inflation

Gross Fixed Investment/GDP

Exchange Rate, End of Period

Exchange Rate (% Yr Change)

Fiscal Balance (% del PBI)

Trade Balance (US$ MM)

Exports

Imports

Current Accounts Balance

(% of GDP)

International Reserves

2010

153,964

8.8

2.1

25.1

2.81

-2.8

-0.3

6,750

35,565

28,815

-3,782

-2.5

44,105

2011

176,761

6.9

4.7

24.1

2.70

-40

1.8

9,302

46,268

36,967

-3,341

-1.9

48,816

2012

199,682

6.3

2.7

26.7

2.55

-5.4

2.1

4,527

45,639

41,113

-7,136

-3.6

63,986

2013 (E)

208,434

5.2

2.9

27.2

2.80

9.4

0.9

-625

42,206

42,831

-10,839

-5.2

66,00

2014 (P)

217,219

5.5

2.4

27.4

2.83-2.85

1.8

0.0

215

44,759

44,544

-9,752

-4.5

67,000

% = per cent; Var = variation; Yr = year; (E)Estimates; (P)projections. Source: Statistical institute, BCR, BCP

** Countries with GPD higher than US$150 billion. Source: WEO, IMF

AVERAGE GDP GROWTH :2006 - 2012 **

15.7

10.4

7.7

6.9

6.4

6.3

5.9

5.6

4.9

4.8

4.7

4.5

4.3

4.3

4.2

4.1

4.0 3.9

3.9

Isra

el

Ch

ile

Po

lan

d

Mala

ysi

a

Tu

rkey

Sau

di A

rab

ia

Pakis

tan

Ven

ezu

ela

Co

lom

bia

Ph

ilip

pin

es

Eg

yp

t

Sin

gap

ore

Ind

on

esi

a

Kazakh

stan

Arg

en

tin

a

Nig

eri

a

Pe

ru

Ind

ia

Ch

ina

Qata

r

7.0

Latin Lessons : Peru

47

Peru has been running a

moderate current account

deficit in recent years,

fuelled primarily by high

investment.

In 2013, the current account deficit

peaked at 5.2 per cent of GDP, a

manageable level in light of the overall

health of the Peruvian economy. These

gaps have been financed primarily by

FDI flows (equivalent to almost 10 per

cent of GDP in 2013), linked to large

mining and other infrastructure projects.

By the same token, international

reserves climbed due to export growth

and the associated trade surplus of

2002-2011. At the end of 2013, net

international reserves hovered at

close to USD$66 billion or 30 per

cent of GDP, more than six times the

USD$10 billion held by the country

a decade earlier.

The business-friendly and stable

macroeconomic environment has

triggered a significant wave of

productive investment, both domestic

and international. Flows grew at the

rate of 13 per cent a year in 2002-2012,

with gross fixed levels climbing to 28

per cent in 2013, a record level for the

country and the highest in the region.

Although mining and hydrocarbons

have absorbed a significant proportion

of the investment flows, manufacturing,

real state, electricity, and tourism have

also attracted increasing interest.

Investment growth slowed in 2013 to

4 per cent as a result of uncertainties

surrounding the international

economy and domestic concerns with

the direction of some government

decisions. These flows are expected

to accelerate again starting in 2014

driven by new mining and infrastructure

projects.

In recognition of its outstanding

performance, Peru is one of the few

countries in the region that has gained

investment-grade status from all major

credit rating agencies. The country's

legal system accords foreign investors

the same treatment as their local

counterparts. Furthermore, there are

no sector restrictions nor performance

or national content requirements

for foreign owned operations. The

constitution guarantees the rights

of investors to freely repatriate

their capital, dividends or royalties.

Moreover, investors that meet certain

requirements can enter legal stability

agreements that fix tax, labour and

other conditions applicable to their

operations. In addition, Peru has entered

several bilateral Investment Protection

Treaties and has included similar

protection provisions in most of the

Free Trade Agreements it has entered

into in recent years. Not surprisingly,

FDI has been on the rise, reaching more

than USD$12.2 billion in 2012.

48

Latin Lessons : Peru

As part of its stabilisation and structural adjustment efforts in the

early 1990s, Peru revamped its foreign trade regime, reducing

and rationalizing its tariffs and doing away with almost all

restrictions that hindered international trade.

In recent years, the country has continued to unilaterally reduce

its customs duties and has narrowed their scope. The weighted

average tariff rate now stands at only 1.2 per cent, one of the

lowest in Latin America.

The dynamism of its international trade is another important

aspect of Peru’s recent growth story. In 2001-2012, export growth

averaged 5.8 per cent a year, one of the highest in the region.

Exports climbed from USD$6.3 billion in 2000 to a record-setting

USD$49 billion in 2011, but dropped to USD$45.6 billion in 2012

and $42 billion in 2013 due to lower mineral prices.

commodities account For aLmost 85 per cent oF exports, with mineraLs representinG cLose to 60 per cent oF the totaL. copper and GoLd are the most important exports, with shares oF 23 per cent and 20 per cent, respectiveLy. other exported mineraLs are zinc, siLver and moLybdenum.With over USD$2.2 billion in exports in 2012, fish-meal and fish

oil are among Peru's top five exports. Coffee exports are also

significant with close to USD$1 billion in sales during the same

year. Shipments of other non-traditional agricultural products

such as avocados, grapes, paprika and asparagus are gaining in

importance (USD$3 billion), have shown continued growth over

the last decade. Among manufacturing exports, textiles are the

most significant, with over USD$2 billion in 2012.

In parallel to booming exports, Peru has seen a steady increase in

its import bill, from USD$7.4 billion in 2000 to almost USD$42.8

billion in 2013, mostly explained by the increase inflow of capital

goods and intermediate inputs associated with the implementation

of large investment projects. Continued import growth and lower

exports resulted in a negative trade balance of USD$625 million in

2013, the first in eleven years.

internationaL trade

49

VOLUME OF EXPORTS (2000=100)

Brazil

70

90

110

130

150

170

190

210

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: WEO - IMF (Oct 2012) and BCRP.

VOLUME OF EXPORTS AVERAGE PER CENT GROWTH 2001 - 2012

2.2

Chile

3.9 5.5 5.7 5.8 Colombia Mexico

Peru

Source: Central Bank

EXPORTS

0

5

199

2

199

4

199

6

199

8

20

00

20

02

20

04

20

06

20

08

20

10

20

12

10

15

20

25

30

0

5

10

15

20

25

30

35

40

45

50

Percent GDP In USD Billion (Left Axis) Total Exports (Right Axis)

50

Latin Lessons : Peru

mininG and peru´s Grow

th

Peru’s export/import markets are among the most diversified in

Latin America, with a growing presence of Asian markets in the

trade matrix. Whereas a decade ago the US was the country's

largest trading partner, that position is now occupied by China

(17 per cent of total trade). The US has seen its participation

drop from 25 per cent to 13 per cent of total trade. Switzerland is

ranked third, thanks in large measure to its purchases of Peruvian

gold. However, if we take the European Union (EU) as a block, its

trade with Peru is comparable in size to that of China. In terms

of exports, the largest destination market for Peru is China, with

the US coming in second place. The US still ranks as the most

important country of origin for Peruvian imports.

Unilateral trade liberalisation efforts have been complemented with

bilateral free trade agreements (FTAs), which Peru has pursued

actively, starting in 2006, when it negotiated an ambitious trade

accord with the US. Since then, the country has entered similar

FTAs with all its major trading partners, including the EU, China,

Japan, Canada, EFTA and Korea. In addition, Peru has been an

active participant in regional integration efforts and is a member

of the Andean Community of Nations (encompassing Colombia,

Ecuador and Bolivia). It has also liberalised trade with MERCOSUR

and other neighbours in the region, including Chile and Mexico.

Peru’s FTAs currently cover 51 countries, representing 45 per cent

of the world population and 85 per cent of global GDP. Over 95

per cent of Peru’s exports and 90 per cent of imports benefit

from the preferential treatment of FTAs. The country is an APEC

member and is currently involved in the Trans-Pacific Partnership

negotiations. It is also part of the Pacific Alliance with Colombia,

Chile and Mexico.

Mining has become one of Peru’s most important growth

engines. Peru is the world’s third-largest producer of copper,

second-largest producer of silver and zinc, and the sixth-largest

producer of gold.

Not surprisingly, the most important mining multinationals operate

in the country, including Teck, BHP Billiton, Anglo-American, Rio

Tinto, Glencore, Newmont, and China’s Minmetals and Shougang.

The relative weight of the industry has been expanding over the

last decade (it currently stands at 14 per cent of GDP), leading

some critics to argue that the current mining boom has deepened

the country’s dependence on primary resources and crowded out

51

other higher value-added productive activities. The evidence

shows, however, that domestic industrial production has

broadened and increased in complexity. Measured in volume terms,

non-traditional exports more than trebled their size over the last

decade, outpacing the volume growth of mineral production.

Nevertheless, because the price of minerals reached historic

highs, the contribution of mining to the country’s total export

account grew significantly. Equally important, macroeconomic

data demonstrate that Peru has been able to avoid the negative

consequences of Dutch disease that often plague commodity

exporters.

mininG has become a maGnet For ForeiGn direct investment (Fdi) as weLL. in 2013, the inFLow oF Fdi into mininG represented usd$8.5 biLLion.The pipeline of planned investments, including the expansion of

existing operations, and the development of new mines, many

of which have secured the approval of Environmental Impact

Assessments (EIAs) and other authorisations, could top USD$53

billion by 2020. The future of mining will hinge, however, on

what happens with the wave of social conflicts and community

opposition that has engulfed many mining projects. According

to the National Ombudsman Office’s 2013 reports, active social

conflicts have tripled over the last five years. Of the total 148

socio-environmental conflicts identified, 70 per cent are related

to mining. Protests and strikes in Cajamarca, located in the

northern highlands, brought about the suspension of the USD$4.8

billion Conga gold project. Similar objections have affected other

mineral producing regions, hindering the implementation of many

promising projects.

52

Latin Lessons : Peru

the chaLLenGes ahead

Economic reforms and responsible management enabled Peru to

seize the opportunities presented by a favourable international

context to accelerate economic growth over the last decade.

However, if the country is to sustain high growth into the future

and broaden its economy to include more value-added productive

activities, it will need to deepen structural reforms. In order

to enhance competitiveness and productivity, it is critical for

the government to enhance human capital, narrow its current

infrastructure gap and strengthen institutions. Not surprisingly,

Peru occupies the 61st position out of 144 participants in the

global competitiveness index (third in Latin America after Chile

and Mexico).

peru has made important strides in providinG universaL primary and secondary schooLinG, achievinG access LeveLs that are superior to those oF countries with comparabLe Gdps.

GLOBAL COMPETITIVENESS INDEX 2013–2014 (144 PARTICIPATING COUNTRIES*)

(*) 1=better and 144=worse. Radar indicates place in the ranking.Source: World Economic Forum.

80

120

BusinessSophistication

Market Size

TechnologicalReadiness

Financial MarketDevelopment Labor Market

Efficiency

Goods MarketEfficiency

Higher EducationAnd Training

HEALTH AND PRIMARY EDUCATION

Macroeconomic Environment

INFRASTRUCTURE

INSTITUTIONS

INNOVATION

0

40

53

Nevertheless, expanded enrolment has

not been matched by improvements

in the quality of education. Peruvian

children spend on average more time

in school than in any previous era, but

that does not mean they are achieving

the age-specific learning needed

to become productive workers upon

graduation.

In the 2012 PISA international exam,

Peruvian students ranked last among

participants from 65 countries in

reading, maths and science. Although

more resources are being earmarked

for education (3 per cent of GDP),

those efforts will be insufficient to bring

about the changes needed if decisive

steps are not taken to tackle the most

critical problem affecting schools:

low-quality teaching.

It is important to point out

that some promising measures

have been implemented to

revamp teacher recruitment,

training and promotion. These

reform initiatives, however,

have met with the opposition

of the National Teachers

Union, which staunchly

opposes measures that link

performance evaluations to

compensation.

Higher education has also seen a

similar transformation, with expanded

enrolment (close to 30 per cent of

students who complete high school)

but significant quality gaps exist. The

international QS ratings put Peruvian

universities at the bottom, with only

two of them classified in the 550th to

660th range. The numbers of professors

with doctoral and other graduate

degrees are limited, and very few

universities have research programs.

Efforts are underway to implement a

university accreditation system aimed

at improving the quality of training,

and an office is being established

that will keep track of labour market

participation for graduates of different

subject and universities. The data

provided will help correct the

information asymmetries that currently

plague the higher education market.

Sustained future growth will also

hinge on the capacity of the Peruvian

economy to innovate in order to

diversify its productive capacity

towards higher-value sectors.

Unfortunately, Peru devotes very few

resources to research and development

(0.1 per cent of GDP), less than other

countries of similar size in the region.

Not surprisingly, Peru’s ratio of

registered patents (0.12 per 100,000

people) is one of the lowest in Latin

America. Consistently with these gaps,

the WEFs Competitiveness Report

Index ranks Peru in the 117th place

when it comes to measuring innovation

(its lowest position in the ranking).

Lack of adequate

infrastructure is another

important issue that

threatens to restrict

future economic growth.

According to some estimates, Peru

currently has an infrastructure deficit

of close to USD$90 billion, concentrated

in roads, ports, air transport, railways

and electrification, among others.

Although some progress has been

54

Latin Lessons : Peru

made in recent years, the infrastructure gap remains significant.

The Global Competitiveness Index places Peru well behind its

neighbours when it comes to the quality of infrastructure, with the

lowest scores registered in railway and road systems. The current

administration is trying to promote Public-Private Associations to

build and operate needed infrastructure and is expected to put

over USD$10 billion in large projects out to tender in 2014.

Another area where important progress is urgently needed

is institutional quality, broadly understood as the set of rules

needed to dispel economic and political uncertainty and lower

transaction costs. Although there have been some improvements,

significant deficits persist when it comes to accountability,

control of corruption, government effectiveness and regulatory

quality. In the latter sphere, although Peru does relatively well

in the World Bank’s Ease of Doing Business Ranking (43rd out

of 185 participants - second in Latin America after Chile), there

is still considerable scope for improvement, particularly in the

streamlining of authorisation procedures that currently hinder

private investment. Although public administration has some

islands of excellence, such as the ministries of the economy

100

150

0

50

ResolvingInsolvency

EnforcingContracts

Trading Across

Borders

Paying Taxes

Protecting Investors

Getting Credit

Registering Property

Getting Electricity

Dealing WithConstruction Permits

Starting A Business

EASE OF DOING BUSINESS 2013 (185 PARTICIPATING COUNTRIES*)

Source: World Banks’s Doing Business 2013. (*) 1=better and 185=worse.

55

and international trade, weak institutional capacities are the norm

as reflected in the low levels of capital budget execution (70

per cent in 2013). By the same token, according to opinion polls

corruption has become the second most important problem facing

the country, only just behind personal security.

Thanks to the ambitious economic reforms it has implemented,

Peru has been able to transform its economy dramatically,

becoming the fastest-growing economy in the region. The

country’s impressive performance has been driven primarily

by private investment and domestic consumption. Responsible

macroeconomic management and the establishment of a market-

friendly business environment are key to explaining Peru’s

recent growth trajectory. As a result of the policies put in place

to facilitate private investment and the free-flow of goods and

services, Peru was able to seize the opportunities made available

by improved terms of trade. Although the recent contraction

in mineral prices associated with the slowdown of the Chinese

economy has brought about a moderation of Peru’s growth rate,

it is projected to remain among the highest in Latin America

(5-6 per cent) in the coming years.

peru has proGressed siGniFicantLy over the Last two decades, improvinG the quaLity oF LiFe oF its popuLation, reducinG poverty and inequaLity considerabLy.These achievements have been made thanks to sustained

economic growth. Whether the country is able to maintain these

trends and escape the “middle-income” trap will depend on its

ability to successfully overcome key structural constraints.

To that end, it will need to enhance human capital and improve

the quality of education. Likewise, infrastructure will have to be

upgraded in order to fuel continued growth. Finally, it is critical

that the country strengthen its institutions, building on top of

recent advances in order to bolster government efficiency and

accountability. The conditions are in place for Peru to consolidate

its position as the New Andean Jaguar.

concLusion

LatinLessons

ch

Ile

In the 1930s, arguably the most significant weakness of Chile’s economy was its vulnerability to international economic fluctuations.

In fact, a steep economic recession triggered

by the Great Depression in 1929 severely

affected the country, highlighting Chile’s high

level of reliance on natural resources, such as

nitrates and copper. The economic downturn

spurred the government of Pedro Aguirre

Cerda to push ahead with the creation of the

National Development Agency (Corporacion

de Fomento de la Produccion de Chile

– CORFO) with the primary objective of

industrialising the country and encouraging

import-substitution of goods considered

economichistory

56

By

57

to be critical for the economy. Thus,

protectionism emerged as a central

component of government policy.

Despite an initial dramatic increase

in economic growth, protectionism

soon proved unsuccessful. The

government ended up paying large

amounts in subsidies and domestic

state-owned firms failed to find new

markets in which to expand and grow.

Furthermore, copper was still the main

export and remained an important

source of government income.

Between 1950 and 1970, the Chilean

economy grew at marginal rates

and GDP expanded at an average of

3.8 per cent a year. Together with a

policy of import substitution, local

currency was highly overvalued, which

undermined non-traditional exports.

Inflation became more prominent from

the 1950s, reaching as much as 84

per cent in 1955, arguably due to poor

fiscal policy. Despite all the efforts

of successive governments, inflation

remained an important issue during

much of the 1960s.

During the 1960s, and especially

during the administration of President

Eduardo Frei Montalva, a number of

initiatives were launched to reform

the economy, including rural land

ownership, a limited liberalisation

of external trade relations and a

policy of limited devaluations aimed

at preventing currency exchange

deterioration.

Chile’s political and economic scenario

changed dramatically in 1970 when

Salvador Allende took power, supported

by the Popular Coalition which had

a number of radical measures in the

pipeline, including, amongst others,

the expropriation of strategic state-

owned companies, an increase in

real wages and reduced economic

dependence on international markets.

One underlying foundation of the new

economic policy was that the country’s

economy possessed an important idle

capacity. This, according to the new

government, had been caused by two

factors: the monopolistic nature of

domestic manufacture; and income

distribution. Based on this diagnosis,

it was believed that redistribution of

income among lower-class segments

would boost domestic demand and

industrial production.

Soon after taking power, radical

measures were implemented, including

reform of rural land ownership and

nationalisation of big copper mining

companies.

By Nicolas Munoz

58

Latin Lessons : Chile

at the same time, waGes dramaticaLLy increased by an averaGe oF 48 per cent. initiaLLy, the economy experienced a biG boost, and reaL Gdp Grew by 7.7 per cent and unempLoyment decreased beLow 4 per cent, but most importantLy, income distribution improved to LeveLs never seen beFore.Unfortunately, by 1972 a number of major macroeconomic

problems became apparent. Inflation soared to over 200 per cent,

the fiscal deficit grew to 13 per cent over GDP and international

reserves fell to as low as USD$77 million. Given such profound

economic problems, relations between different political parties

reached a crises such that on 11 September 1973 the government of

Salvador Allende was brought to an abrupt end by a military coup.

After the military took over the government in 1973, radical

economic changes were implemented. Chile experienced a

transition from an economy isolated from the rest of the world,

with strong government intervention, into a liberalised, world-

integrated one, where market forces were allowed to guide most

economic decisions. One of the fundamental objectives of the

government was to open the economy to the rest of the world

by increasing exports as well as inbound foreign investment.

The liberalisation and modernisation of the banking system

was another important component of the economic agenda,

implemented by privatising state-owned banks, as well as freeing

interest rates.

59

industriaL structure oF chiLe now

With a geographical area of 755,776 km2, and endowed with

mineral resources and great biodiversity, Chile is one of the

narrowest and most remote countries in the world.

The Republic of Chile is a unitary state made up of 15 regions

comprising 345 communes and is governed by a presidential

system, with direct universal suffrage and elections held every

four years: the president is the head of government and state;

38 senators look after the interests of the 19 subdivisions; and

513 deputies take care of 60 districts.

Chile has a population of 16,634,603 inhabitants according to

the 2012 census. 86.9 per cent of the population resides in urban

areas, Santiago being the most populous city, with 4,977,637

inhabitants (30 per cent of the country’s population), followed

by the provincial cities of Concepcion with 971,368 inhabitants

and Valparaiso with 734,406 inhabitants.

In economic terms, Chile’s gross domestic product (GDP)

amounts to USD$285.703 billion (nominal). This makes Chile

the 38th-largest economy in the world, ahead of Malaysia,

Singapore and Nigeria, according to the IMF. Chile also occupies

40th position in the United Nations Development Programme’s

Human Development Index, and falls into the category of Very

High Development (four positions up compared to 2012).

2.4%

5.6%

6.6%

8.3%

11.7%

11.2%

13.6%

14.6%

26.5%

Electricity, Gas & Water

Financial Services

Transport & Telecomunications

Construction

Hotels, Retail &Hospitality

Manufacturing Industry

Agribusiness, Forestry, Fishery & Real Estate

Mining

Professional Services

GDP BREAKDOWN 2012

% = per cent. Source: SOFOFA (Association of Chile’s Industrial Companies)

60

Latin Lessons : Chile

CHILE : 2013 INTERNATIONAL RANKINGS

RANKING INSTITUTION POSITION IN LATIN AMERICA

WORLDWIDEPOSITION

HumanDevelopmentIndex 1

1

2

1

40

7

22

39

United NationsDevelopmentProgram

GlobalCompetitivenessIndex

CorruptionPerception index

Index of economic Freedom

LogisticPerformance Index

World EconomicForum

TransparencyInternational

HeritageFoundation

World Bank

2 34

GENERAL ECONOMY STATISTICS

% = per cent. Source: ‘Chile 2014, Pacific Alliance’ International Investor

Population (Millions) 17.4

Population Growth (5 Year Average)

GDP (USD In Billions) 286.6

GDP Growth (Average, Last 5 Years)

GDP Per Capita (PPP) $22,400

2012 Inflation Rate 3%

Value Added By Primary Activities

Value Added By Industries Including Mining

Value Added By Services 57.5%

Gross Financial Debt As Percentage Of GDP

Net Financial Debt As Percentage Of GDP

Exchange Rate In 2012 (CLP Per USD)

Export Of Goods And Services (As A Share Of GDP)

Import Of Goods And Services (As A Share Of GDP)

Current Account Balance (As A Share Of GDP)

Total FDI Between 2010 – 2012 (USD In Billions)

Gross Domestic Expenditure On R&D (As A Share Of GDP, 2011)

2012 Unemployment Rate 6.4%

Income Inequality (Gini Coefficient, 2011)

2009 Relative Poverty Rate 30.2%

1%

3.8%

3.4%

-6.9%

39.1%

12.2%

486.8

34.2%

33.9%

-3.5%

68.62

0.4%

0.501

61

Chile is also one of Latin America’s fastest-growing economies.

Over the past 20 years the country has recorded an average

annual growth of 3.5 per cent and per capita income has almost

doubled in real terms. During 2013, Chile entered the group of

economies classified as high-income by the World Bank. The

country’s GDP per capita, measured in purchasing power parity

(PPP), tripled between 1985 and 2012 rising from USD$6,238 to

USD$18,211. The inflation rate has been reduced from more than

30 per cent in the mid-1980s to a stable range of between 2 and 4

per cent per year. The poverty rate has dropped from 45 per cent

in 1987 to 14.4 per cent in 2011, while indigence has been reduced

from 17.4 per cent to 2.8 per cent in the same period.

The banking system has undergone many changes since the

1970s. At that time, it was characterised by a limited product

offering, minimal competition, high margins and almost non-

existent professionalisation.

Several reforms have been enacted since then, such as

liberalisation of credit loans, the reduction of the reserve

requirement on domestic currency deposits, access to external

credit and the liberalisation of interest rates. In addition, several

mergers and acquisitions have taken place, resulting in larger

banks with significant market share. In recent years, the system has

faced lower growth rates, domestic inflation in the range of 2 to 4

per cent per annum, and historically low interest rates. This has had

consequences for the banking system: placements have disrupted

the high growth trend that has been the outstanding feature for

approximately 12 years; and the provisioning that has been made

and the write-offs that have occurred have been unlike anything

seen in the last 15 years.

All this has generated the need to increase internal efficiency

levels. Consequently, a new scenario seems to be evolving in the

banking system, and it will likely be characterised by stabilised

portfolio risk, a more open system allowing the entry of new

institutions, the emergence of new sources of business financing

such as credit unions, commercial houses and compensation

funds and more flexible regulation. Today, it is not just banks

and financial institutions that are involved in financial business.

New players are constantly entering the market, especially retail

sector companies financing consumer operations. This reality has

imposed a more demanding climate in which banks, traditional

bankinG industry and Finance

62

Latin Lessons : Chile

or otherwise, have to operate. At present, Chilean banks are

embarking more and more on internationalisation ventures, which

occur through three channels: cross-border loans and financial

investments; the establishment of branches or representative

offices abroad; and direct investment in shares of banking

companies established abroad.

For the past 20 years, as a result of legislation passed in 1980

establishing a privatised pension fund system, the asset industry

in Chile has been largely dominated by the large pension fund

managers (Administradoras de Fondos, or AFP). The legislation

made it mandatory for all employed people to belong and

contribute to a local pension fund of their choice.

Historically, the pension funds, together with the insurance

companies, have channelled, and continue to channel, the bulk

of the local capital to investment managers. Because of this,

the assets under management (AUM) are highly influenced by

the AFP’s specific requirements. However, there has been recent

growth in retail investment, as the Chilean economy continues

steadily to grow, resulting in a larger base of high net worth

individuals and family groups.

Chile has long been a mining-oriented country and even though

a significant portion of Chile’s current mining legislation

was enacted during the 1970s (including foreign investment

contracts, an updated mining code and tax benefits), most world-

class deposits discovered from this period onwards were not

developed until Chile returned to democracy in 1990 and a new

wave of foreign investment began.

While the National Copper Corporation of Chile (Corporacion

Nacional del Cobre de Chile - Codelco) has remained state-

owned since its creation, over the past 30 years the private

sector has increased its participation and has contributed to the

consolidation of the industry, increasing production more than

twenty fold. In 1980, production from the private sector amounted

to approximately 160,000 tons of copper, equivalent to 15 per cent

of that year’s total production.

At present, private sector copper production amounts to

approximately 3.5 million tons out of a total 5.3 million tons,

a remarkable 66 per cent.

mininG: the backbone oF the economy

63

in the next two decades, it is predicted that 70 per cent oF the committed investment wiLL come From the private sector.Copper is not Chile’s only resource: gold, zinc, iron ore, nitrates,

iodine and molybdenum all benefit from the economies of scale

provided by copper mining. Chile’s geography can accommodate

an extensive and robust logistics infrastructure, including railroads,

highways and port facilities.

In the period 2006-2011, almost 25 per cent of Chile’s revenue

came from mining, totalling USD$62 billion. In addition, during

the same period, the industry contributed 16.4 per cent of the

country’s GDP and 64

per cent of Chile’s total

exports. One sector of the

economy that has reaped

huge benefits from mining

is seaborne transport:

more than 50 per cent

of total cargo comprises

mining and mining-related

products.

In regards to agribusiness, Chile is a southern hemisphere leader

in the export of fresh fruit and the horticultural industry is one

of Chile’s most important economic sectors. The industry is

also regarded as one of the most crucial in terms of economic

development and in generating investment and employment at

all levels, together with a number of positive externalities.

The fruit industry involves over 14,000 producers, more than

60 processing companies, packing stations and other industry-

related suppliers. The export sector encompasses around 7,800

producers and more than 600 export companies. The industry

also generates more than 450,000 direct jobs, which include

permanent and seasonal work, and indirectly employs more than

one million people in industry- specific positions totalling more

than 1.5 million jobs.

The huge pipeline of mining

investments slated for the

next two decades engenders

a number of significant

challenges, many of which

are related to energy, water

and human resources.

aGribusiness

64

Latin Lessons : Chile

EVOLUTION OF PROJECT PORTFOLIO 2008 - 2013(USD in billions)

Source: COCHILCO (Copper Chilean Commission)

29.743.2

50.0

66.9

104.3112.6

2008 2009 2010 2011 2012 2013

Source: COCHILCO (Copper Chilean Commission)

(000' tonnes)

Ch

ina

Belg

ium

Au

stra

lia

So

uth

Ko

rea

Neth

erl

an

ds

Can

ad

a

Ind

ia

Un

ited

Sta

tes

Oth

ers

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

COPPER EXPORT DESTINATION 2012

65

After the establishment of neoliberal policies during the mid-

1970s and consolidation of the economic model implemented

by the so-called “Chicago Boys” in 1982, Chile entered one of

the deepest economic recessions in the country’s history since

the Great Depression.

This economic crisis was caused mainly by an over-valued

currency and high domestic interest rates, which rendered

investment extremely difficult for most industries. In addition,

highly deregulated commercial banking placed overwhelming

strains on the country’s financial sector. As a result, GDP shrank

by 14.3 per cent, unemployment reached 23.7 per cent and the

Chilean peso devalued by 18 per cent.

On 1985, President Augusto Pinochet appointed Hernan Buchi

Finance Minister. Buchi is credited with creating the so-called

“Chilean miracle” by implementing the following measures:

• Major reductions in government spending.

• Promotion and development of private investment by reducing

profit taxes and VAT.

• Strong currency devaluation in a bid to foster exports.

• Privatisation of state-owned companies such as CAP (Pacific

steel company), ENDESA (electric generation), ENTEL

(telecommunications), IANSA (sugar manufacturer), LAN CHILE

(the national airline)

• Interest rates set by the Central Bank instead of the market.

After the implementation of these reforms, Chile entered a

period of prosperity and one of the fastest-growing stages

in the country’s history took place during the years 1986

to 1997, witnessing growth rates of as much as 12 per cent

in 1993, with an average of 8 per cent.

In 1998, Chile’s economy was badly impacted by the Asian Crisis,

which resulted in an abrupt shrinking of exports, a considerable fall

of GDP growth to 0.9 per cent and an unemployment level of over

10 per cent.

Since the late 1990s, Chile has signed a number of free-trade

agreements with numerous countries in Latin America as well as

the rest of the world. Up to this point, Chile has signed 22 FTAs

involving more than 60 countries, reaching a global market of

the medium-term outLook

66

Latin Lessons : Chile

more than 4.2 billion potential consumers. In terms of foreign

direct investment, Chile has gradually been attracting more and

more international corporations keen to exploit Chile’s natural

resources, seek new markets and drive cross-border efficiencies.

Chile’s GDP is expected to grow at 4.0 – 4.5 per cent in 2014

according to Chile’s central bank. Domestic demand has been

growing strongly over recent years but it is expected to cool

slightly in 2014-2015. On the other hand, external demand is

expected to recover, and this may boost exports, especially to

traditional markets which have seen signs of recovery.

The price of copper seems to have peaked, as forecasts for the

first time in several years have projected a price lower than in

2013, which would adversely affect Chile’s fiscal revenue. Copper

demand is expected to increase by 3 per cent, however, reaching

21.2 million tonnes according to the Ministry of Mining. The major

challenge for the industry is to increase productivity and reduce

production costs, in particular energy, labour and water, which

have been soaring over the last few years. In political terms,

some important objectives and reforms have been announced

by the new government coalition, including tax reform, achieving

a structural balance by 2018 and an increase of expenditure on

education.

Unemployment remained low during 2013 and it is expected to

stay that way in 2014 and 2015. Some 250,000 new jobs were

created in 2013 and the majority of these new workers are females

(57 per cent), which is in line with the government’s objective

of increasing female participation in the workforce. In addition,

90 per cent of such jobs take place in the formal market which

provides access to pension funds, unemployment insurance and

“permanent” status. Having said that, the OECD has projected a

slight increase in unemployment to 6 - 6.5 per cent

unempLoymentkey medium-term Forecasts

67

According to the Global Competitiveness Report 2013- 2014

released by the World Economic Forum, Chile is ranked 34th

out of 148 countries (one position down from 2012-2013), where

it exhibited outstanding scores in “pillars” such as institutions

(28th), macroeconomic environment (17th), an efficient

government (18th) with a balanced public budget and low

levels of public debt, and competitive markets with high levels

of domestic competition (32nd) and openness to foreign trade

(29th).

In addition, the country has made significant efforts to boost

information and communication technologies (ICT) indicators,

almost doubling its international internet bandwidth capacity

from 20 to 40 kb/s per user (43th) as well as increasing its

number of internet users (45th). Despite these strengths, Chile’s

relative position suggests a degree of stagnation in the country’s

competitive model and an urgent need to diversify its economy

and move to higher-value-added activities. A poor education

system and lack of specialised skills can create additional

challenges to local companies wishing to undertake innovative

projects. This, along with low innovation investment, especially

in the private sector (58th), results in a low overall innovation

capacity (63rd).

Note: For the list above, respondents were asked to select the five

most problematic for doing business in their country and to rank

them between 1 (most problematic) and 5. The bars in the figure

show the responses weighted according to their rankings

Significant economic growth and reforms have noticeably

reduced unemployment as well as poverty. To some extent, this

has had a positive impact on improving income inequality, though

this remains remarkably high. Women and young people have

enlarged the labour force, but their participation rate remains low

compared to OECD standards. During the period 2003 to 2012,

female participation grew from 36.6 per cent to 47.5 per cent,

while male participation shrank from 73 per cent to 72.2 per cent,

dIscUssIon of key IssUes

competitivenessincLusiveness oF Labour markets

68

Latin Lessons : Chile

* Out of 148 countries; ** 1–7.

Source: World Economic Forum

GLOBAL COMPETITIVENESS INDEX

GCI 2013 - 2014

GCI 2012 - 2013

GCI 2011 - 2012

Basic Requirements

Institutions

Infrastructure

Macroeconomic

Environment

Health And Primary

Education

Efficiency Enhancers

Higher Education

And Training

Goods Market

Efficiency

34

33

31

30

28

46

17

74

29

38

36

4.6

4.6

4.7

5.3

4.9

4.5

6

5.7

4.6

4.9

4.6

Labor Market Efficiency

Financial Market

Development

Technological

Readiness

Market Size

Innovation And

Sophistication Factors

(26 per cent)

Business Sophistication

Innovation

45

20

42

42

45

54

43

4.5

4.8

4.5

4.5

3.9

4.2

3.6

Rank Score Rank Score

THE MOST PROBLEMATIC FACTORS FOR DOING BUSINESS IN CHILE

Source: World Economic Forum

00.1

0.91

1.21.22.24.44.57.3

89.2

10.713.816.519.2

Government Instability/Coups

Inflation

Crime And Theft

Policy Instability

Foreign Currency Regulations

Corruption

Poor Public Health

Poor Work Ethic In National Labour Force

Tax Rates

Inadequate Supply Of Infrastructure

Access To Financing

Tax Regulations

Insufficient Capacity To Innovate

Inefficient Government Bureaucracy

Inadequately Educated Workforce

Restrictive Labour Regulations

69

according to ECLAC. Barriers and deterrents persist for females to

enter on employment, including attitudes toward work, childcare

commitments as well as regulations regarding childcare provision.

Even though overall education quality and access to higher

education have improved, early stages of compulsory schooling

remain the priority. According to the OECD, Chile’s high minimum

wage and strong employment protection hamper access to the job

market among low-skilled workers. In addition, public employment

services and training systems remain underdeveloped.

Some recommendations provided by the OECD to overcome

the issue include extending high-quality childcare, promoting

flexible working hours, expanding the reduced minimum wage

for youth under 18 to those under 25 years and implementing

the reformed apprenticeship contracts, strengthening the public

training framework through quality standards and performance

assessments for training providers.

Chile’s overall growth has been achieved by an accumulation

of incremental factors over the past decade, and there has

also been a recent increase in productivity. Research and

development is conducted mainly by universities as business

R&D intensity and innovative outputs are low. In addition,

technological progress is hampered by shortage of qualified

graduates in disciplines such as the sciences, technology and

engineering management. Government policy has become

more supportive of innovation over the last several years, with

reforms enabling new entrepreneurs to open businesses more

easily and quickly, as well as gaining access to financing. R&D

tax credit regulations have made it easier to claim, and its usage

is increasing. However, there remains plenty of room to expand

innovation policies and to implement new programmes and

incentives.

Some recommendations provided by the OECD to boost

entrepreneurship and innovation include further co-ordination and

association among different national stakeholders by establishing

the Ministry of Innovation and facilitation of industry and research

linkages, and promotion of public-private coordination to exploit

natural resources.

FosterinG entrepreneurship and innovation

70

Latin Lessons : Chile

Macroeconomic policies and commodity prices have carried

Chile through a long phase of economic growth and job creation.

The banking system is healthy, and the sound government

financial position has been rewarded by low sovereign spreads

and credit rating upgrades. The economy is expected to continue

growing steadily and inflation

has remained at historic lows.

Strong domestic demand coupled

with weakening foreign markets

have pushed the current account

balance into deficit, which

has been financed mostly

through FDI.

OECD recommendations in this regard include maintaining the

sound macroeconomic policy framework and keeping a medium-

term budget target consistent with a strong government net

financial position. In addition, further development of high-

quality education and efficient, well-evaluated social protection

programmes should be implemented and funded by combating

tax evasion.

Strong economic growth has resulted in significant deterioration

of Chile’s environment due to intense natural resources

exploitation, notably impacting air quality and the availability

to clean water, which have both been significantly degraded.

The use of renewable energy is limited almost entirely to

hydropower, and fossil fuel sources of energy, which are mostly

imported, accounted for 65.9 per cent of energy consumption

in 2012. Mechanisms to overcome environmental externalities

have been implemented yet remain insufficient. There is plenty

of room for the mining sector to reduce its emissions and soil

contamination.

The OECD’s recommendations include formulation of a strong

green growth strategy which should support the achievement

of emissions and renewable energy targets, the development

of effective mechanisms to optimise water use and ensure the

enforcement of obligations on owners of mining licenses to

mitigate pollution and negative externalities.

Reliance on copper

exports has,

however, increased

Chile’s exposure of

risk to commodity

price fluctuations.

a more environmentaLLy- FriendLy country

boostinG Grow

th

71

Chile is currently experiencing an energy crisis which has

somewhat hampered its industrialisation and has adversely

affected its business competitiveness.

At present, Chile is reliant on international supplies of oil and

gas, which accounted for 65.9 per cent of its energy in 2012.

In addition, Chile’s growth is correlated with energy demand such

that consumption is expected to increase by 5-6 per cent a year.

By 2020, demand is expected to be 100,000 GWh.

It should be noted that mining accounts for 37 per cent of

energy consumption, which is expected to increase given the

mining projects announced for upcoming years. At present, the

price of energy in Chile is around USD$0.14/KWh, which is one

of the highest among OECD countries and this has affected the

development of energy- intensive projects such as those in mining

and manufacturing.

From a government standpoint, the Ministry of Energy has set

an agenda based on six pillars, namely: a boost in efficiency;

development of renewable energies; a new role of conventional

energy fostering optimal use of hydroelectricity; focus on

transmission; more competitiveness in the electricity market;

and regional integration and cooperation.

enerGy chaLLenGes

Source: Chilean Commission of Energy

(Gross Generation GWh)

EXPECTED GROWTH OF ELECTRICITY DEMAND

0.0

50000.0

100000.0

150000.0

200000.0

2000 2010 2020 2030

72

Latin Lessons : Chile

trade and business ties internationaLLy

Chile has a consolidated its position as a free-trade oriented and

open economy. It has signed more than 20 free-trade agreements

(FTAs), gaining access to a global market of more than 58

countries and 4.2 billion people. Bilateral FTAs have been signed

with the European Union, EFTA countries, India, Mercosur, Japan,

Australia, South Korea, China and Hong Kong, Vietnam, the United

States, Turkey and Malaysia, among others.

Chile’s main export partners are China (23.9 per cent), USA

(12.2 per cent), Japan (10.6 per cent) and Brazil (5.5 per cent)

with principal products being copper and its derivatives, fruit,

fish-based products, paper, cellulose and wines. Its main import

partners are the US (21.9 per cent), China (18.2 per cent),

Argentina (6.7 per cent) and Brazil (6.5 per cent) where the main

items imported are oil and its derivatives, chemicals, electrical

equipment and telecommunications, industrial machinery, vehicles

and natural gas.

With regard to foreign direct investment, Chile is presently

one of the world’s largest recipients of foreign capital. In 2012,

overall inbound FDI reached USD$30.323 billion, which ranked

the country 11th globally and was an increase of 32.2 per cent

from 2011. The most important investing countries in 2012 were

the United States (19 per cent), Spain (18 per cent), Canada (12

per cent) and Japan (8 per cent). So far as capital recipients are

concerned, mining accounts for 34 per cent, followed by financial

services (33 per cent) and electricity, gas and water (8 per cent)

(FDI stock).

Not only has inbound investment witnessed a dramatic increase,

but outward investment has significantly picked up as well.

Interestingly, in 2012, Chile was the 17th-largest investing country

worldwide with a total figure of USD$8.553 billion, which was an

CHILE’S POSITION AS A WORLDWIDE EXPORTER OF SELECTED GOODS

CopperLithiumIodine

TroutPrunesSalmon

BlueberriesFresh Plums

Source: Chilean Commission of Energy

First Place

73

increase of 47 per cent above

2012 levels (USD$5.819 billion).

In 2012, Colombia was the main

destination of Chilean investment

(USD$5.315), followed by Brazil

(USD$916 million), the United

States (USD$552 million), Peru

(USD$477 million) and Canada

(USD$243 million).

A key driver for Chilean

companies expanding abroad

is the rapid saturation of its

small domestic market, making

international expansion the

only growth avenue. This has

been the case for retailers, food

and beverage manufacturers

and transport companies. Thus,

companies like Cencosud,

Falabella, Ripley, CCU,

Embotelladora Andina, Concha

y Toro, Carozzi, CSAV and LAN

have expanded into neighbouring

countries, taking advantage of

the geographical proximity and

cultural similarity.

Another important driver

has been the cross-border

exploitation of natural resources

to build competitive advantage.

Forestry-related firms CMPC

and Arauco for instance, have

replicated their domestic

business models in Argentina,

Brazil and Uruguay; they have

integrated vertically to manage

both forest management,

processing and subsequent sales

domestically and/or exports

abroad. Wine producer Concha

y Toro has also taken advantage

of its production capabilities to

manufacture in Argentina and

the US.

With a different approach,

minerals producers SQM

and Molymet have kept their

extraction processes in Chile

but have taken more control

over distribution, marketing and

processing facilities in foreign

countries.

The Pacific Alliance is an important initiative implemented by

Chile, Mexico, Peru and Colombia, created in April 2011. Its main

objectives are to build an integration zone with a firm commitment

toward free movement of capital, goods and people, to foster growth,

development and competitiveness of the member countries and to

become a hub of regional integration in economic and commercial

terms with special emphasis on Asia-Pacific. Home to 38 per cent of

the population of Latin America and the Caribbean and 34 per cent

of its GDP, the group already accounts for half of intraregional trade,

50 per cent of regional trade with Asia and 42 per cent of foreign

direct investment in Latin America, according to the Inter-American

Development Bank. Panama and Costa Rica have said they are eager

to join the Pacific Alliance, and some thirty countries have already

been granted observer status, including Australia, Canada, China,

India, Japan, New Zealand, Singapore, Spain, the United Kingdom,

the United States and Uruguay.

paciFic aLLiance

past, present and Future oF a country LookinG For a path oF its own“Peruvians descend from the Incas; Mexicans,

from the Aztecs; Argentines, from... boats”

This saying is a good starting point to try to understand

the social makeup of Argentina, a country with a vast,

sparsely populated territory and enormous potential.

Let us take a quick look at the history.

LatinLessons

AR

ge

nt

InA

74

75

Argentina, like all of the Americas, was first conquered by the

Spaniards and was a part of the so- called Viceroyalties – that is,

the King’s delegations for the administration of the Americas.

The main Viceroyalties were those of Mexico and Peru; the

ones further south were considerably less important. In fact,

although the conquest began in 1500 and Buenos Aires was

founded as early as 1582, the city was of no political significance.

The Viceroyalty of the River Plate was only established in 1776,

and for practical reasons: Buenos Aires was the port of entry

for smuggled goods headed for Bolivia, the main mining centre.

Argentina was therefore only a Viceroyalty for less than 50 years.

By 1810, Argentina had broken with Spain: it was one of the first

countries in the Americas to achieve its independence. The reason

for its successful break with the colonial power was precisely

its remoteness from Spain. There are two important aspects to

this: first, that Argentina was never very dependent on Spain and

accordingly its society was used to making its own rules; and

second, the country developed close relations with the United

Kingdom, given that a large proportion of the smuggled goods

entering Buenos Aires came from Britain.

At war with Napoleon and his ally, Spain, the British saw a

valuable imperial asset in Argentina and attempted to take over

Buenos Aires in 1806. The population’s successful resistance

of this invasion gave them the courage to shake off Spain; and

in 1810 the country gained its independence from the Spanish

crown. Thereafter, Argentina exerted significant influence in Latin

America, given that its army took part in the independence of

Chile and Peru,under the command of General San Martin. In other

words,Argentina had a major presence in America in those early

years, only to turn inward again later on.

Like any country that becomes independent, Argentina took a

long time to achieve some degree of order. A succession of civil

conflicts gradually established the balance of power in the country,

creating a divide that lingers to some extent today – Buenos Aires,

as the main port and urban centre, versus the hinterland, the rest

of the country. This division was referred to as the conflict between

“Unitarians” and “Federalists”. The Unitarians wanted a strong

national State, with its seat of government in Buenos Aires,

and weak provinces; and the Federalists wanted strong provinces

and a weaker national State.

the birth oF arGentina as a nation

By Tomas Bulat

76

Latin Lessons : Argentina

In seeking to understand the essence of Argentina, this is a useful

pointer: ultimately, the Federalists won, and the Constitution of

1860 was Federal – but in practice, the country is Unitarian.

as we wiLL see, this is embLematic oF arGentina – to cLaim it is one thinG and actuaLLy be another.1860 saw the start of the boom years in Argentina’s economic

history, when land was first allotted for beef and agricultural

production. Argentina began to open up to overseas trade and

immigration. The initial waves of European immigrants arrived,

mainly from Spain and Italy, and to a lesser extent Germany,

the Netherlands and Denmark. The other significant current of

immigration was from Lebanon, Turkey and Syria. These migrant

cultures gradually moulded today’s Argentine nationality.

The way land ownership was allocated played a fundamental

role in Argentina. While in the US, pioneers were given a square

league of land on a first-come-first-served basis, in Argentina land

was assigned to military officers or leaders of bourgeois society.

As a result, when large waves of immigrants started to arrive there

was no land left to give – the land had its owners and what was

lacking was a labour force.

So immigrants came here to work other people’s lands, not

their own.

Argentina’s economic growth in those years rested on three

pillars. The first was a strategic alliance with Britain. The country’s

capacity as a supplier of beef, wheat, cotton, tanned hides and the

like was huge, and in turn the UK supplied it with industrial goods.

This was not just about trade however – it extended to investments

in Argentina. The railways, power companies, tramways and the

ports all involved British investments that gradually developed the

country’s infrastructure.

The second pillar was the establishment of democracy, albeit

subject to fraud and elite compacts: from 1860 onwards, presidents

could remain in office no longer than six years, after which they

were required to pass on the job to someone else. 1916 saw the

introduction of compulsory voting and the secret ballot, thus

broadening the social basis of democracy.

arGentina’s GoLden aGe

77

The third and highly significant pillar was Law No 1420 on

Compulsory Education. At the time, this law paved the way for the

greatest education drive in Latin America. Most of the immigrants

from Europe were illiterate or had 2 or 3 years of schooling at best.

Education was also important as a unifying force, providing

a common identity to all the nationalities that now had to coexist.

Additionally, in 1918 there was a major university reform –

from that point on universities became autonomous and broke

free from the strong influence of the Church. This produced

a significant leap forward in university education.

so it was on the strenGth oF these three piLLars that arGentina became one oF the worLd’s richest countries and the most important nation in Latin america. it was a country whose Growth was hiGhLy dependent upon in its trade with the worLd, and especiaLLy with the uk.

In the 1930s, the three pillars of Argentine growth all collapsed.

The 1930s crisis hit an open economy like Argentina’s head on.

The fall in UK demand left the country with a major economic

contraction. This led to a crisis and the attempted solutions

for the nation’s troubles only made matters worse.

First, from a political viewpoint, President Yrigoyen was

overthrown and the first military dictatorship was installed.

There was no more democracy: parliament was dissolved and

the judiciary subdued. A few years later elections were resumed,

but with exclusions and fraud, generating increasing social

divisions.

The main divide was between those who could take part in politics

and those who could not.

the 1930s crisis – the start oF the decLine

78

Latin Lessons : Argentina

Once again, there was conflict among Argentines. In fact, the

1930s were labelled by several Argentine historians as a “decade

of infamy”.

Secondly, the economy. Argentina’s ruling class wanted to

preserve the previous economic programme, based on trade with

the UK, at all costs; but it was effectively defunct. The country’s

political leaders, either out of short-sightedness or self-interest,

failed to accept that the world had changed and sought to

maintain the status quo.

This led to a well-known 1933 trade treaty, known as the “Roca-

Runciman Pact” after the officials who signed it, which was

a symbol of an Argentina that wanted to return to the past and

did not understand the future.

unsurprisinGLy, the aGreement was a FaiLure.Thirdly, education. In this case the best symbol of decline came

with the government of Juan Domingo Peron, when the phrase

“shoes, not books” was coined, as Argentine society gradually

began to lose its regard for education.

The process of educational decline, which was slower than the

others, came to a head in 1966 – under another military regime

– on the so-called “Night of the Long Sticks”, when truncheon-

wielding police stormed university buildings and drove teachers

out by force, leading a large proportion of Argentina’s intellectual

elite to head overseas. Cesar Milstein, Argentine recipient of the

Nobel Prize for medicine, was among those who left, heading to

the UK.

The erosion of the three pillars continued up to and during

the worst dictatorship Argentina endured – in the global

context of the Cold War –, which ended with the Malvinas

(Falklands) War in 1982.

79

The loss of political stability led in turn to instability in the

economy, as economic policy began to reflect a short-term view.

Elected governments simply did not know how long they would

remain in power.

Neither did military regimes – but the latter had to justify the

coups that installed them by highlighting the blunders of the

ousted administrations and by launching plans to set things right.

These plans, in turn, were short-lived. Between 1955 and 1983,

the average government lifespan was less than two years, and

only one government made it to five, while the constitutionally-

mandated presidential term was six years.

Consequently, presidential instability made it impossible to

develop long-term policies. So it was that Argentina swung back

and forth between periods of liberalisation and protectionism,

with neither trend lasting very long. The only constant were the

changing rules.

arGentina’s ‘mood swinGs’ inspired a weLL-known arGentine enGineer to write a paper caLLed 'the arGentine penduLum', expLaininG how the rapid shiFts From one proGramme to the next prevented the adoption oF consistent poLicies aLLowinG For economic Growth.During these years, Argentina’s economy did grow but with

significant ups and downs and increasing inflation. Inflation

became “a part of Argentina’s social and political culture”.

As a means of putting off actually having to deal with problems,

inflation suited a society with no long-term view.

The worst of times came in the 1970s with the emergence

of guerrilla organisations, linked to Peronism but not answering

to Peron himself. A wave of bombings, kidnappings and takeovers

of military facilities began, in an escalation of violence. In July 1975,

General Peron died and in March 1976 there was yet another coup.

This marked the start of the so-called “Process of National

Reorganisation”, a dictatorship that was responsible for the

disappearance of over 10, 000 people – human rights NGOs speak

arGentina’s mood swinGs and the short term

80

Latin Lessons : Argentina

of 30,000, but 9,900 cases were officially recorded – and the

deaths of many others occurred in armed combat.

This regime, the worst in Argentina’s history, came to an end

after going to war against the United Kingdom over the Malvinas

Islands. The military government invaded the islands in April

1982 and by 10 June it had surrendered. The war, as terrible as

it was futile, had the sole aim of preserving the political power

of the regime.

The defeat at the hands of the British gave way to the restoration

of democracy, after seven years of blood and death in Argentina.

On 10 December 1983, democracy was restored to Argentina

and, unexpectedly, the Peronists were beaten in the presidential

elections. The winner was the traditional middle-class party,

the Union Civica Radical (UCR), under the leadership of Raul

Ricardo Alfonsin.

The elected government faced many challenges – multiple political

demands for justice, participation and freedom, together with

a heavy economic legacy of 300 per cent-plus annual inflation,

a foreign debt default and a badly crippled industrial sector.

the historic triaL oF the miLitary juntasThe new government’s main challenge was to uncover the truth

about the ‘disappeared’ and bring those responsible to justice.

Never before in Argentina’s history had the generals who staged

a coup been put on trial.

After a two-year trial, the generals were found guilty of the forced

disappearance and murder of several people. But what was most

important was that the trial was public and, as a result, all of the

proceedings were publicised and widely followed. This generated

a heightened awareness among Argentine society of what had

happened and led to the publication of a book called Never Again,

representing the country's will never again to allow a dictatorship

to come to power.

Thus Argentina has had democratically elected governments since

1983: there are elections every two years, this has provided the

country with clearer political settings.

1983 : the restoration oF democracy

81

sinGLe-party ruLe under peronismHowever, Argentina’s democratic

institutions are still very weak, and

power has become increasingly

concentrated in a single party, the

so-called Peronist party. Since the

inauguration of Carlos Menem in

1989, with the exception of two years

(1999-2001), Peronism has always been

in government.

The fact is that this party has

cleverly managed to present itself as

government and opposition at the same

time. Thus Menem’s main opposition

came from Eduardo Duhalde, his Vice-

President. Later on, Duhalde backed

Nestor Kirchner for President, only for

the latter to, in turn, break with Duhalde.

And today, once again, the main

opposition to the Peronist government

is from Peronism itself.

Consequently, Peronism constantly

succeeds itself in power, with

fluctuations in its economic policies:

populist tendencies in the boom years

and a more rightist inclination in harder

times – all within the one political party.

In fact, Peronism is not driven by

any political standpoint (or notion

of whether the country should have

a free-market or socialist makeup),

but by the will to power. The ideology

changes as required by the need to

remain in power. This explains why

every Peronist president toys with the

idea of constitutional reform, with a

view to eluding presidential term limits.

In this context, Argentina’s democracy

needs to evolve further and see the

establishment of at least two parties

to alternate in power, as well as the

renewal of the political bureaucracy.

In any case however, the holding

of free elections every two years

provides a measure of institutional

stability that is requisite to Argentina’s

development.

economic instabiLityArgentina is slowly building its

political stability, but economic

stability is pending.

At the outset of democracy, and

weighed down by a legacy of default

and inflation, President Raul Alfonsin

launched the first anti-inflation

programme implemented by a

democratic government in Argentina,

the so-called “Austral Plan” of June

1985. The plan was successful at first,

bringing monthly inflation down from

20 to 1.5 per cent.

But social unrest and the inability to

balance the fiscal situation saw the

government defeated in mid-term

elections in 1987, and thereafter inflation

ballooned to hyperinflationary levels.

In 1989 it reached nearly 5000 per cent

p.a., with a monthly peak of 196 per

cent in July 1989.

After 1989 there was a second burst

of hyperinflation in early 1991, leading in

March of that year to the introduction of

a programme known as “convertibility”.

This anti-inflation programme involved

two basic principles.

82

Latin Lessons : Argentina

The first was that the Argentine peso

was pegged to the US dollar at a one-

to-one parity. The second was that the

Argentine Central Bank was required

to acquire one US dollar for every

Argentine peso it issued – in other

words, the printing of money to fund

public spending, or for any purpose

other than the acquisition of US dollars,

was forbidden.

The programme was initially a

great success, lowering inflation

from 1340 per cent p.a. in 1990

to just 4 per cent p.a. in 1992,

and inflation stayed very low

until the end of convertibility

in December 2001.

A fixed exchange rate provides a

short-term advantage, in that it

lowers expectations and organises

the economy. It was, in that context,

a powerful tool against inflation.

But over time, with productivity in

Argentina growing at a slower pace

than in the US, the economy lost

competitiveness and maintaining the

fixed exchange rate became impossible.

In an effort to preserve the currency

peg, the Argentine government turned

to capital markets and took on debt

to an unrepayable level. Convertibility

came to an abrupt end with a steep

devaluation of the Argentine peso,

which went from one to the US dollar to

four to the dollar in just two months.

The devaluation meant the government

was unable to pay its external debt:

the country declared itself in default

and began renegotiation discussions

with creditors that became a recurring

feature of those years. Argentina

successfully renegotiated a large

proportion of its foreign debt, but

many issues remain unresolved to this

day, such as the Paris Club debt and

the matter of the so-called holdouts

(private creditors who turned down

the 2005 debt swap), who are litigating

in New York.

After the hard years of the worst

economic crisis in Argentine history,

there was nowhere to go but up:

already by 2003, Argentina’s economy

was recovering at rates of 8 per cent

a year and it continued to do so until

2008, the year a conflict broke out with

farmers over an extraordinary tax the

government sought to push through

despite issues concerning its legitimacy.

That year the economy began to lose

its momentum.

Once again, the penchant for economic

mismanagement that is typical of

Argentine governments reared its ugly

head, and as of 2012 the economy

slipped back into a process of

stagnation with high inflation (above

25 per cent p.a.).

Clearly, Argentina’s economy is highly

cyclical. This is a country where

economic growth can shoot up over

8 per cent in a year only to plummet by

6 per cent just as easily. A tremendously

volatile country, whose average per

capita growth rate, in spite of the peaks,

is low.

83

In the here and now and there are constant demands to meet

immediate needs, regardless of future consequences.

However, as a community we are slowly progressing. This may

be a society that has slipped into reverse, but it has bounced

back before.

Argentina is the world’s eighth-largest country, but only the

44th in terms of its population. This means its territory is largely

uninhabited. Although Australia is bigger and its population

smaller, the proportion of desert is much lower in Argentina.

The greater Pampas region boasts over 40 million hectares

of arable land, with the capacity to produce food for 600

million people.

Argentina also has large amounts of minerals, and the world’s

third largest shale gas reserves. So, Argentina has the potential

to produce abundant supplies of the food and resources that the

world needs and is ready to pay for.

Learning from the experience that Australia went through in the

eighties in opening up its economy and setting clear regulations

for economic activities would allow Argentina to reset its course

onto a path of growth. Australian know-how and both intellectual

and financial capital will be of enormous help to Argentina in the

coming years.

After all these years of crisis, Argentina is in the position Australia

found itself in during the late twentieth century. By learning its

own lessons, Argentina can reshape its economic rules, incentives

and institutions for a much better, brighter future.

Argentina can return to a path of stable and sustainable growth,

leading to an improved quality of life for all of its people, just as it

experienced in the heady days of the nineteenth century as one

of the most prosperous societies in the world.

arGentina’s potentiaL

LatinLessons

UR

Ug

UA

y

Like most Latin American countries, the economic history of Uruguay is characterised by intense cycles of boom and bust in GDP, living with high levels of inflation, external imbalances, but above all, of continuous learning.

The difficulty of sustaining extended periods of growth

placed the output growth rate at 1.4 per cent between

1955 and 2004. Structural reforms implemented in

the country in the last thirty years1, along with the

economic policies applied, have increased the long-

term growth rate of the economy, which currently

stands at 4 per cent.

84

85

The 1980s marked a period of great economic hardship across

Latin America, referred to as the "lost decade". In Uruguay,

this period was characterised by an economic and foreign

debt crisis in 1982 and the restructuring of the political system,

with the restoration of democratic government in 1984, after a

dictatorship that had lasted over 10 years.

Uruguay entered the 1990s with the need to strengthen its

political and democratic institutions and implement structural

reforms that would sustain the process of economic growth. After

the dictatorship2, Uruguay was able to consolidate one of the

strongest democratic regimes in the region3. There is also strong

legal certainty and respect for the fundamentals of economic

activity. This has been the case in Uruguay regardless of which

party is in power. In fact, since the return to democracy the

three main political parties have rotated, maintaining a strong

commitment to respect the rules of the game and strong political

and social stability.

In the 1990 s, most of the economies in the region promoted the

so-called "second generation reforms" driven by the vision of the

Washington Consensus (seeking to complement those of the "first

generation" that had begun in the 1970s that aimed at a greater

liberalisation of markets). Although Uruguay did not undergo the

process of privatising state companies that took place in other

countries in the region, there were grants and partnerships that

operated as alternatives to privatisation, keeping public companies

in state hands, which remains the position today. Similarly, there

was a gradual opening up to competition in some markets: mobile

telephony, water, insurance, port services and higher education.

structuraL reForms

1 Commercial and financial openness 2 Uruguay suffered a

dictatorship from 1973 to 1985 3 Uruguay ranks first in Latin

America in the Democracy Index prepared by The Economist

Intelligence Unit (2012).

By Mariana Ferreira

86

Latin Lessons : Uruguay

One of the main reforms was the one undertaken on the social

security system (1995), which passed from a state system to

a mixed system with two pillars: intergenerational solidarity

(managed by the State) and individual savings (managed by

the AFAP4). Among the reforms of the 1990s, the most notable

was that of the capital market (Securities Market Law of 1994),

which has been complemented by the emergence of institutional

investors: insurance companies, investment funds and pension

managers.

Finally, the reform process to open up to external markets began

with the liberalisation of trade restrictions, reducing tariffs

and signing bilateral agreements (CAUCE and PEC) with major

trading partners Argentina and Brazil, respectively. In 1991,

Uruguay, Argentina, Brazil and Paraguay signed the Treaty of

Asuncion creating MERCOSUR, deepening the trade liberalisation

process initiated in the mid-70s. In 2006, Venezuela joined

Mercosur and in August 2012 joined the bloc as a full member.

In 2002, Uruguay faced its worst-ever economic crisis, brought

on by the religion recession (Brazilian devaluation in 1999 and

an economic-financial crisis with devaluation in Argentina in

2001), coupled with a highly dollarised Uruguayan economy

with its fixed exchange rate as a nominal anchor. Also, there was

a strong commercial and financial dependence on Brazil and

Argentina, with significant external imbalances that resulted in a

financial crisis and severe economic recession. During the crisis,

GDP dropped 14 per cent, unemployment soared (20 per cent),

poverty and homelessness in the following years reached almost

40 per cent and 5 per cent respectively, among other effects that

left deep scars in the country.

The Uruguayan economy managed to recover and social and

political stability played a crucial role in this. In order to support

the process of debt restructuring, the political system and all

actors involved committed to working together, which reflected

the maturity of the Uruguayan democratic system. This enabled

Uruguay to avoid default and thus maintain the historic pledge

to pay the sovereign debt. This "successful" response has provided

the basis for the growth that the economy has been experiencing

for several years.

21st century beGins with a new economic crisis

4 Pension Fund Administrators.

87

In contrast to what happened during most of the twentieth

century, in the last decade Uruguay's growth has been

characterised by high rates, a significant increase in investment

and strong exports.

The Uruguayan economy grew at an average annual rate of

6 per cent between 2005 and 2012, which enabled its GDP to

reach a record high of almost USD$50 billion in 2012. The orderly

management of macroeconomic policy is also mirrored in its fiscal

and monetary performance. In the last ten years, the primary

result has remained in positive and stable values and inflation has

stayed in single digits.

ten years oF sustained Grow

th

Source: Uruguay XX1 based on date from Central Bank of Uruguay,

Ministry of Economic Affairs

0

2

2005

7.5

4.1

6.5

7.2

8.9

6.5

3.9 43.5

2.2

2006 2007 2008 2009 2010 2011 2012 2013E 2014E

4

6

8

10

GDP GROWTH RATE (PER CENT)

The country also has an orderly management of its public debt.

The debt-output per centage was gradually reduced due to a

lower degree of public indebtedness, while significantly reducing

its dollarisation. Additionally, a major re-profiling of the debt was

made, improving terms and rates. This process occurred in parallel

with a relative increase in reserve assets, which shows that the

country has financial backing.

88

Latin Lessons : Uruguay

This orderly macroeconomic management led Uruguay to achieve

investment grade5 rating. This reflects the trust generated by

the country's institutional framework and the management of

economic policy and has had positive impacts on public finance

by reducing the State's financial costs and making it easier to

obtain credit internationally.

Uruguay has been characterised as being a country with low

investment rates. Between 1983 and 2004, the investment rate

(in GDP per cent) was 15 per cent. Between 2005 and 2012

this per centage increased reaching an average of 20 per cent.

This improvement occurred due to, among other factors, the key

role played by Foreign Direct Investment (FDI).

With regard to FDI, in the last few years, Uruguay has positioned

itself as a trustworthy and attractive destination for foreign

investors, by virtue of a favourable investment climate and

promising macroeconomic performance. In response, the FDI

inflow in 2012 registered its historic peak of USD$2.775 billion,

representing 5.4 per cent of GDP.

Fdi received by uruGuay comes mainLy From arGentina, spain, the netherLands, braziL and the united states. In the past few years, productive FDI inflow has been mostly aimed

at the construction, farming and industry sectors. What is most

important is that this investment has focused on new projects

and capabilities, concentrating on sectors that export goods

and services internationally.

comprehensive investment promotion scheme

5 Granted by Standard & Poor's and Moody’s in 2012, and by Fitch

Ratings and DBRS in 2013. Uruguay lost its investment grade in the

crises of the beginning of the 21st century.

89

This strong investment growth occurred thanks to an appropriate

framework for domestic and foreign investors established by

the Investment Law. In Uruguay, local and foreign investors are

guaranteed equal treatment and incentives to promote investment

are available for both. There are no limits to the transfer of income

or capital repatriation and no prior permits are required.

Within the framework of the Investment Law, various sectors have

received incentives and have been increasingly important in the

transformation of our productive structure, for example renewable

energy, shipbuilding, the electronics industry, agricultural

machinery and equipment manufacturing, planting of fruit trees,

forestry, biotechnology, tourism and export global services among

others. Other attractive benefits for the investor are the Free Zone

regime6, Industrial Parks, Customs warehouses, Free Ports and

Airports schemes.

6 They sepecialise in mega projects and global export services

Source: Central Bank of Uruguay

FDI (MILLION US$)

0

500

2002 2004 2006 2008 2010 2012

1,000

1,500

2,000

2,500

2,7753,000

90

Latin Lessons : Uruguay

In recent years, the export of Uruguayan goods and services

has recorded a substantial growth in value. The export of goods

increased from USD$2 billion in 2002 to a record of USD$10

billion in 2012. The cumulative annual growth rate was 16 per

cent during this period.

This growth took place in conjunction with an important process

of technological modernisation, diversification and value adding

to traditional products (mainly meat, leather, wool and dairy).

In particular, in the case of meat, Uruguay has become

internationally renowned for implementing a unique electronic

traceability system that enables to follow meat products from

"farm to fork".

In addition, the country is diversifying both its products and

their export destinations. In the past few years, the country has

exported new products such as cellulose (with the opening of

UPM7 and the future Montes del Plata8 plant), grains (soybean

and wheat, mainly), auto parts and medicines. Uruguayan goods

were exported to over 160 countries in 2012.

Moreover, between 2002 and 2012 export of services from

Uruguay increased fivefold, reaching USD$4 billion in 2012.

This growth is partly due to the boost in tourism, but also as a

result of the significant development in global export services,

among which software, audio-visual productions, life sciences,

professional and financial services are notable.

Additionally, Uruguay has gone through a profound shift in

production activities in the past two decades, as reflected in the

change in composition of Uruguayan exports (see P.91).

export Growth

and diversiFication

7 From Finland 8 Chilean, Swedish and Finnish capitals

91

EXP0RT GOODS AND SERVICES (MILLION US$)

0

3,000

2003 2005 2007 2009 2011 2013

6,000

9,000

12,000

15,000

Goods

Services

Source: Uruguay XXI based on data from Central Bank of Uruguay, Ministry of Economic Affairs

and Free Zone Census 2012

MAIN EXPORTS (PER CENT)

0 5 10 15 20 25

Source: Uruguay XXI based on data from Central Bank of Uruguay, Ministry of Economics Affairs

and Free Zone Census 2010

1990

2012

Tourism

Non-traditional Services

Dairy Products

Wood, Wood Pulp And Paper

Agriculture

Chemical, Plastic And Rubber Products

Transport Services

Meat And Live Animals

Leather And Fur

Textiles And Footwear

Others

92

Latin Lessons : Uruguay

in the cominG years, the uruGuayan economy is expected to continue GrowinG at rates oF around 4 per cent, extendinG the decade oF uninterrupted Growth. in the FoLLowinG tabLe some oF the projections that support this trend are shown.

GDP (Ann Var %)

GDP (Million US$)

Population (Millions Of People)

GDP Per Capita (US$)

Unemployment Rate – Ann Av (% Labor Force)

Exchange Rate (Pesos For US$, Ann Av)

Exchange Rate (Av Ann Var)

Consumer Prices (Ann Acc Var %)

Export Of Goods (Million US$)

Imports Of Goods (Million US$)

Commercial Superavit/Defict (Million US$)

Commercial Superavit/Defict (GDP %)

Global Fiscal Result (GDP %)

Investments (GDP %)

Gross Debt (GDP %)

Foreign Direct Investment (Million US$)

Foreign Direct Investment (GDP %)

2009

2.2

30,229

3.34

9,037

7.73

22.6

7.73

5.9

5,425

6,907

-1,482

-4.9

-1.7

17

76

1,529

5.1

2010

8.9

38,847

3.36

11,573

6.8

20.1

-11.12

6.9

6,727

8,622

-1,895

-4.9

-1.1

18

615

2,289

5.9

2012

3.9

49,920

3.38

14,767

6.1

20.3

5.2

7.5

8,751

11,656

-2,905

-5.8

-2.8

21

62.4

2,775

5.6

2014*

3.5

58,298

3.40

17,125

7.1

22.6

9.7

8

9,148

11,962

-2.814

-4.8

-2.7

20

63

3,000

5.1

2011

6.5

46,435

3.37

13,779

6

19.3

-3.7

8.6

8,022

10,676

-2,654

-5.7

-0.9

19

582

2,505

5.4

2013*

4

55,824

3.39

16,456

6.6

20.5

1.2

8.9

9,057

12,015

-2,958

-5.3

-2.1

22

62.8

3,000

5.4

Ann = annual; Av = average; % = per cent; Var = variation; Acc = accumulated.

Source: Central Bank of Uruguay, Ministry of Economic A�airs. National Institute of Statistics, Uruguay 100

INDICATORS

93

Uruguay is a socially integrated country since it does not

have ethnic or religious conflicts or groups that have been

excluded from its social or institutional framework. In this

context, the sustained economic growth of the past decade

has been reflected in an improved quality of life. Rated as the

most transparent, stable and safe country in Latin America by

numerous international rankings, it also has a pleasant climate

and hospitable and welcoming population.

Regarding progress in social issues, according to a recent World

Bank study9, the middle class grew from 40 per cent of the

population to 63 per cent, which turns Uruguay into the region's

country with the highest proportion of middle class people.

This is also reflected in the decrease of the Gini Inequality Index,

transforming Uruguay into the most egalitarian country

in Latin America.

Additionally, there has been a

sharp reduction in households

living below the poverty line

and in indigent conditions.

While in 2004, 29 per cent of the

households were poor and 2.5

per cent indigent, in 2012 these

figures dropped to 8.9 per cent

and 0.3 per cent respectively.

Among the reforms that kept pace with this process of growth

it is worth mentioning the creation of the National Integrated

Health System in 2007, which enabled a significant portion of

the population to access new benefits, and the tax reform that

achieved considerable improvements in the efficiency and equity

of the tax system.

Finally, Uruguay has stood out internationally for being the first

country in the world to implement the program “One Laptop Per

Child (OLPC)”, through the Ceibal Plan, that provides a laptop

to every public school, high school and technical college student.

In this way, Uruguay

has consolidated its

position as one of the

countries with the

lowest incidence of

poverty and extreme

poverty in Latin

America10.

Growth, quaLity oF LiFe and sociaL

and diGitaL incLusion

9 “Economic mobility and growth of the middle-class in Latin

America”. World Bank (June 2013) 10 Source: National Statistics

Institute (INE).

94

Latin Lessons : Uruguay

The Ceibal Plan is yet another success story that Uruguay has

exported to the world. In particular, it has allowed for a substantial

reduction of the digital gap, while requiring the creation of new

capabilities among the population and opening an important

window of opportunity for the future.

Uruguay is anticipating the challenges of economic growth.

Work is underway to build a more efficient country, creating new

business opportunities for companies.

In this regard, there has been a continuous process of adjusting

the rules and laws to the reality of the twenty-first century.

In 2007, the Law on Protection of Competition was passed in

favour of maximising the welfare of economic agents and in 2008

the Bankruptcy Law was passed seeking to simplify, unify and

facilitate the process of bankruptcy.

A new Customs Code is being developed that will update

terminology and customs regulations to international standards

and will enable greater consistency and unification of legislation.

This new Customs Code gives equal weight to the customs

role of being both facilitator and operational overseer of trade

operations. Furthermore, progress is being made in improving

state processes, including some milestones such as the customs

modernisation process (digitisation of procedures, decentralized

payment, Single Window for Foreign Trade), facilitating payments

to the tax office as well as social security and the implementation

of a programme to open a business in one day.

Likewise, in parLiament a new Law is under consideration in order to update the Free zone reGime; this biLL has been a modeL across Latin america.In addition to all benefits that have already been granted to

companies, the new regime proposes a more effective targeting

of incentives.

LeGisLativeproGress

95

In order to consolidate the process of productive transformation,

growth should be aligned with investments in physical and

human capital. The economic growth of the last decade has

absorbed the vast majority of the skilled human capital, leading

to new challenges for the future. At the same time, it is necessary

to invest in infrastructure required to provide support to the

increasing economic activity.

In this context, it is important to consider the agenda of priorities

for the years ahead so that challenges become opportunities.

Thus, the government has developed a Public Private Partnership

regime (PPP). Through these partnerships, they seek to solve

many of the existing infrastructure problems. The government

expects to enhance the development of the railway system that

is currently underutilised. Given that the large increase of goods

to be transported will entail major investments in roads, the

government is actively seeking out PPP investment in this sector.

Lastly, the building of a deep-water port in the Atlantic zone has

approved by law and will begin in 2014.

smaLL but wiLLinG to take up biG chaLLenGesUruguay is historically known for being a country at the forefront

of social legislation since it made significant progress in its early

days: it was the first country in Latin America to grant women

the right to vote, it implemented a major educational reform

allowing it to achieve high levels of literacy and developed

a Welfare State in the early twentieth century, thus fostering the

creation of an extensive platform of civil and labour rights.

In recent years, Uruguay has implemented new legislation that has

led to wide international recognition. In 2008, an anti-tobacco Law

was passed which has been taken as a model by several countries

and has been praised by various international organisations. In

2013, the Sexual and Reproductive Health Law was approved,

providing support to women with an unwanted pregnancy. In

2013, the Equal Marriage Law passed enabling marriage between

persons of the same sex.

uruGuay, a maverick country

uruGuay into the Future

96

Latin Lessons : Uruguay

In late 2013, Uruguay appeared on the radar agenda of the

international media for passing a law that legalizes the purchase

and sale of marijuana, as well as permitting cultivation for

personal use. This initiative has been praised internationally as

a powerful tool to fight drug trafficking, since the State would

be responsible for producing and distributing goods and it would

be combined with strong market regulation and education policy

to raise public awareness.

it is on the basis oF this proGress, which enabLed the country to improve the quaLity oF LiFe oF its peopLe, that 'the economist' maGazine recentLy chose uruGuay as "country oF the year" For 2013.In recent years Uruguay has shown significant growth, which

together with the reforms passed and more that are currently

under way, has made significant progress on its development

agenda. This has demonstrated that, despite of being a small

country, it has the capacity and potential to face and live up to

big challenges. This has positioned it as a "Maverick" country,

a country that seeks to improve the quality of life of its people,

a country that breaks conventional wisdom and dares to

incorporate new practices.

97

Foreign trade between Uruguay and

Australia does not yet involve large

volumes of goods. In 2013, exports

from Uruguay to Australia were

approximately USD$750,000 and

were mainly wood, fruit juice, ceramic

ornaments, rice and wine. Uruguayan

imports from Australia reached

USD$20 million in 2013.

Despite the low bilateral trade flows,

there are strong ties between the two

countries. From the commercial point

of view, both countries can readily act

as gateways to their respective regions.

In particular, Uruguay has plenty to

learn from the best practices of a

country with the level of development

of Australia in different fields. First,

Australia has vast experience in the

mining sector and Uruguay has started

some initiatives that could benefit

from Australia's experience. Second,

the Australian educational system

has yielded significant benefits to

its population and Uruguay could

benefit from the Australian model

in order to improve opportunities

for all Uruguayans. Third, given that

both countries have an important

livestock base (in dairy farms and

meat and wool producing ranches),

there are interesting opportunities for

the exchange of innovative practices

both in the use of technology, as well

URUgUAy – AUstRAlIA : stRengthenIng tIes

as biotechnological advances. In this

respect, the association between

Uruguay and Australia to develop,

innovate or enter third markets (as

has happened with the INIA and

Latrobe University and some sales

transactions in which meat producers

of the two countries joined forces)

could be exploited to a greater degree.

Australia has also been a pioneer in the

implementation of projects in public-

private partnerships, which is one of the

main sectors Uruguay seeks to develop

in the coming years.

Last but not Least, there is the LarGe community oF uruGuayans LivinG in austraLia, who can certainLy enhance and FaciLitate trade and investment in the Future.

LatinLessons

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| INTRODUCTION

Daron Acemoglu and James A. Robinson (2012) Why Nations Fail: The Origins of Power, Prosperity and Poverty. New York: Crown Publishers. ISBN 9780307719218. 529 pages.

Ian W. McLean (2012) Why Australia Prospered: The Shifting Sources of Economic Growth. Princeton: Princeton University Press. ISBN 9780691154671. 312 pages.

| CHILE

World Economic Forum “Global Competitiveness Report 2013 – 2014”

OECD “Economic surveys Chile 2013”

International Investors “Chile 2014, Pacific Alliance” 2014

Vale Columbia Center, Eclac, University of Chile “A snapshot of Chile’s 20 largest enterprises in 2011” May 2013.

Ministry of Energy of Chile “National Strategy of Energy 2013 - 2030” accessible on http://www.minenergia.cl/estrategia-nacional-de-energia-2012.html

Chilean Copper Commission “Chile, pais atractivo para las inversiones mineras” 2013, accessible on http://www.cochilco.cl/descargas/estudios/tematico/inversion/Atractivo-de-Chile-para-Inversiones-Mineras_VF.pdf

| MEXICO

Banco de Mexico (2013) International Trade Statistics.

Boughton, James M. (2012), “Tequila Hangover: The Mexican Peso Crisis and Its Aftermath” in Tearing Down Walls. History of the International Monetary Fund 1990-1999. International Monetary Fund, 2012. Chapter 10

Boughton, James M., 1997 “From Suez to Tequila: The IMF as Crisis Manager” Staff Papers, International Monetary Fund, WP/97/90

Cardenas E. (2010) “La Economia Mexicana en el Dilatado Siglo XX, 1929-2009” in Kuntz S., (2010) coord. Historia economica general de Mexico. De la Colonia a nuestros dias. El Colegio de Mexico, Secretaria de Economia. Comision Organisadora de las Celebraciones del Bicentenario.

Consejo Nacional de Poblacion CONAPO (2013), Proyecciones de la Poblacion 2010-2050 Mexico en Cifras. Available at www.conapo.gob.mx

Consensus Economics Inc. “Latin American Consensus Forecasts”. Long-term forecasts (October 2013) Short term forecast (December 2013)

Fundacion Rafael Preciado Hernandez, FRPH (2011) “1994 y 2009 en Perspectiva” Documento de Trabajo 421

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Grupo Huatusco (2004) ¿Por que no crecemos? Hacia un consenso para el crecimiento de Mexico. Reflexiones de 54 Economistas. Concusion del Seminario de Huatusco 5-7 Junio 2003.

INEGI Instituto Nacional de Estadistica Geografia e Informatica (2013), Banco de Informacion Economica (BIE) in www.inegi.org.mx

Fischer, Stanley, 2001, “International Economic Policy under the Clinton Administration,” speech at Harvard University, June 27.

Partida-Bush V. (2005) “Demographic Transition, demographic bonus and ageing in Mexico”. National Council on Population, Mexico. United Nations expert group meeting on social and economic implications of changing population age structures. Mexico City, Mexico 31 August-2 September 2005. Ref: UN/POP/PD/2005/16

Promexico (2011), “Reigniting the Engines” and “The Automotive Industry at a Glance” in Negocios Magazine, March-April 2011

Promexico (2013a), “The Mexican automotive industry: A leading success story” in Negocios Magazine, March-April 2013

Promexico (2013b), “Mexican Aerospace: An industry on the rise” in Negocios Magazine, May 2013 Promexico (2013c), “Electronic Industry” and “Electric Industry” in Negocios Magazine, September 2013

Promexico (2013d), Mexico Indicators, available online at http://mim.promexico.gob.mx/wb/mim/seleccion_de_indicadores

Lustig, Nora, 1995, “The Mexican Peso Crisis: The Foreseeable and the Surprise,” (unpublished,

Washington: Brookings Institution). Published in Spanish as “Mexico y La Crisis Del Peso: Lo Previsible y La Sorpresa,” Comercio Exterior, Vol. 45, No. 5 (May).

Maddison A (2001). The World Economy: A Millennial Perspective. OECD Development Centre Studies Moreno-Bird, J.C., Jaime Ros (2009). Development and Growth in the Mexican Economy: A Historical Perspective. Oxford University Press 2009

OECD (2003) The World Economy: Historical Statistics. Development Centre Studies. OECD Publishing

OECD (2013) Getting it right: A strategic agenda for the reforms in Mexico. OECD Publishing

OECD (2013) Mexico, Country statistical profiles: Key tables from OECD - ISSN 2075-2288

Ortiz Martinez, Guillermo, 1998, “What Lessons Does the Mexican Crisis Hold for Recovery in

Asia?” Finance and Development, Vol. 35, No. 2 (June), pp. 6–9.

Ortiz, Romero and Diaz (2010) “1979: Cantarell, el salvador de un pais” Expansion Magazine, 1 September 2010

Suarez Davila (2013) Crecer o no Crecer. Del Estancamiento Estabilizador al Nuevo Desarrollo. Ed. Taurus, first edition, May 2013. Wilson, Dominic, Kamakshya Trivedi, Stacy Carlson and Jose Ursua (2011) The BRICs 10 years on: halfway through the great transformation. Goldman Sachs Global Economics Paper No. 208, 7 December 2011.

Word Bulletin (2013) “Turkey part of a new alliance MITKA” News Desk 28 September 2013, http://www.worldbulletin.net/?aType=hab er&ArticleID=119305

Australia and Latin America have historically been separated by geography, culture and different economic ties. Because of their respective colonial links, Latin America looked to Europe and Australia looked to England, and we’ve been in different hemispheric ‘spheres of influence’ ever since.

But things are changing in the 21st century, as Asia and

the emerging markets are on the march and Australia and

Latin America find they have more in common in the Asia-

Pacific century than they have had in the past.

Join Tim Harcourt ‘the airport economist’ and six of

the most eminent economists in Spanish speaking Latin

America for their take on the economic outlook for

the region and the opportunities for Australia.

Latin Lessons is the companion piece to Great Southern

Lands – building ties between Australia and Brazil also

produced by COALAR.

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